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THE   PRINCIPLES   OF 


MONEY  AND  BANKING 


BY 


CHARLES    A.    CONANT 

COMMISSIONER  ON  THE  CURRENCY  OF  THE  PHILIPPINES,  MEMBEP 
OP  THE  COMMISSION  ON  INTERNATIONAL  EXCHANGE 

AUTHOR  OF 

"  HISTORY  OP  MODERN  BANKS  OF  ISSUE  " 

"  WALL  STREET  AND  THE  COUNTRY  " 

ETC..  ETC. 


TWO    VOLUMES 
VOL.    I 


Copyright.  1905,  by  HARPKK  &  BROTHERS. 


PRINTED  IN  THE  UNITED  STATE*  OF  AMERICA 


TO 

HUGH   H.  HANNA 

WHOSE  UNSELFISH  LABORS  HAVE  DONE  SO  MUCH  TO  ESTABLISH! 

A  SOUND  MONETARY  SYSTEM  IN  AMERICA  AND  EXTEND 

IT  TO  OTHER   PARTS  OF   THE  WORLD 


PREFACE 

WHEN  the  writing  of  this  book  was  begun  there  were 
only  two  standard  works  in  English  dealing  syste- 
matically with  the  subject  of  money  and  banking — the 
work  of  General  Walker  on  Money,  and  that  of  Mr.  Jevons 
on  Money  and  the  Mechanism  of  Exchange.  That  both 
were  of  a  high  order  of  merit  is  attested  by  the  fact  that 
they  have  survived  the  changes  of  more  than  a  generation 
since  they  were  written. 

Both  General  Walker  and  Mr.  Jevons  differed  from 
many  modern  economists  on  the  two  important  subjects 
of  bimetallism  and  the  principle  of  a  banking  currency. 
The  chief  justification,  however,  for  a  new  work  on  the 
subject  of  money  and  banking  is  not  afforded  so  much 
by  this  difference  of  opinion  as  by  the  progress  which  has 
taken  place  in  monetary  and  banking  science  since  their 
time.  Many  problems  which  a  generation  ago  appeared 
obscure  have  been  solved  by  the  progress  of  events. 
Systems  of  currency  have  been  successfully  put  in  opera- 
tion which  had  not  then  been  subjected  to  the  test  of 
experience.  It  is  one  of  the  objects  of  this  work  to  record 
the  progress  thus  made. 

Among  the  important  events  which  have  marked  the 
monetary  history  of  the  past  generation  has  been  the 
steady  progress  towards  the  gold  standard  in  commercial 
countries,  until  to-day  other  systems  have  practically 
been  superseded  or  abandoned  in  favor  of  some  form  of 
money  based  upon  gold.  Among  the  steps  which  have 
been  taken  to  bring  about  this  result  are  several  in  which 

v 


PREFACE 

the  writer  himself  has  had  a  share,  for  the  Philippines,  for 
Mexico,  and  for  the  Republic  of  Panama. 

Aside  from  this  record  of  recent  monetary  progress, 
there  are  two  distinctive  subjects  here  treated  which  were 
not  dwelt  upon  in  earlier  systematic  treatises.  One  is 
the  fact  that  the  development  of  money  and  of  existing 
monetary  systems  has  been  the  result  of  a  long  evolution, 
extending  from  the  cattle-money  of  prehistoric  times  down 
to  the  perfected  gold  coin  and  check  and  deposit  system  of 
to-day.  The  other  is  that  the  progress  of  this  evolution  has 
followed  the  principle  of  marginal  utility,  which  has  been 
so  successfully  applied  to  the  solution  of  economic  prob- 
lems, but  was  not  until  recently  applied  in  detail  to  the 
subject  of  money. 

The  chapters  of  this  work  have  been  written  during  the 
interludes  of  other  occupations  during  the  past  six  years. 
Some  of  them  have  appeared  from  time  to  time  in  financial 
and  economic  publications,  but  they  were  written  with  a 
distinct  view  to  this  work  and  not  as  independent  and 
disconnected  discussions.  The  author  acknowledges  ob- 
ligations to  the  publishers  of  the  New  York  Bankers' 
Magazine,  the  North  American  Review,  the  Quarterly 
Journal  of  Economics,  the  Political  Science  Quarterly,  the 
Yale  Review,  the  Journal  of  Political  Economy,  the  Annals 
of  the  American  Academy  of  Political  and  Social  Science, 
Sound  Currency,  and  Trust  Companies'  Magazine,  for  per- 
mission to  use  these  articles  in  this  work.  In  finally  pre- 
paring them  for  publication,  there  has  been  much  re- 
vision, re-arrangement  and  adjustment  of  the  facts  to 
the  latest  available  material. 

In  the  bibliography  will  be  found  a  list  of  about  a  score 
of  books,  marked  with  an  asterisk,  which  in  the  opinion 
of  the  author  would  form  the  nucleus  of  a  useful  library 
for  the  beginner  in  monetary  science.  It  is  not  intended 
in  this  enumeration  to  discriminate  against  many  works 
of  merit  and  importance  not  thus  noted,  but  only  to  in- 
clude one  or  two  representative  works  on  different 

vi 


PREFACE 

branches  of  the  subject  which  together  afford  a  fairly 
comprehensive  view  of  the  evolution  of  money  and  bank- 
ing from  its  beginnings  to  its  modern  development. 

A  French  translation  of  this  work  will  be  published 
shortly  in  Paris.  The  translation  will  be  made  by  the 
well-known  author,  economist  and  banker,  M.  Raphael 
Georges-Levy. 

CHARLES  A.  CONANT. 
MORTON  TRUST  COMPANY, 

38  Nassau  Street, 

New  York,  Sept.,  i,  1905. 


CONTENTS 

BOOK  I 
THE    EVOLUTION    OF    MODERN    MONEY 

I 
THE  PLACE  OF  MONEY  IN  ECONOMICS 

Definition  of  money  here  limited  to  metal  of  intrinsic  value — 
Other  means  of  exchange  properly  defined  as  "currency" — 
Conflicting  views  of  the  money  function — The  economic  im- 
portance of  money — Application  of  economic  principles  to 
monetary  events — How  the  use  of  money  promoted  division 
of  labor  and  emancipation  of  the  laborer  from  the  soil — Money, 
however,  only  one  of  many  factors  affecting  economic  Con- 
ditions   Page  3 

II 

THE  FUNCTIONS  OF  MONEY 

How  money  grew  out  of  the  necessity  for  a  medium  of  exchange 
— Benefits  of  a  common  denominator  for  expressing  relations 
between  various  goods — Importance  of  a  standard  of  value — 
The  standard  and  the  medium  of  exchange  not  always  the 
same — How  money  and  banking  credits  afford  a  store  of  value 
for  postponed  consumption — How  they  thus  become  a  stand- 
ard of  deferred  payments  .........  Page  1 7 

III 
THE  ORIGINS  OF  MONEY 

Not  so  sudden  a  discovery  as  sometimes  assumed — An  evolution 
from  the  segregation  of  private  property — Money  cannot  exist 


CONTENTS 

without  a  surplus  of  capital  beyond  immediate  needs  for  con- 
sumption— Hence  the  money  quality  came  to  be  imposed  upon 
articles  of  ornament  rather  than  necessity — How  gold  and 
silver  became  symbols  of  wealth  and  power — The  gradual 
emergence  of  these  metals  as  the  most  exchangeable  of  com- 
modities  Page  32 

IV 
THE  EVOLUTION  OF  METALLIC  MONEY 

Early  foreign  trade  consisted  largely  of  barter — Use  of  cattle  as 
money  in  early  Greece — Adaptation  of  money  types  to  local 
conditions — The  use  of  kettles  in  the  heroic  ages — The  Spartan 
money  of  iron — Gradual  evolution  of  state  coinage — Theories 
as  to  the  inventor  of  coined  money — Conflicting  claims  of 
Lydia  and  ^gina  —  Rapid  extension  of  the  use  of  money 
among  the  civilized  peoples  of  antiquity  ....  Page  53 

V 
THE  QUALITIES  OF  MONEY 

Good  money  should  have  intrinsic  value — Meaning  of  exchange 
value  —  Importance  of  stability  of  value  —  The  qualities  of 
homogeneity  and  indestructibility — Necessity  that  the  money 
material  should  be  capable  of  subdivision  and  combination 
without  impairing  the  value  of  the  parts — Adaptability  of  the 
metals  for  coinage — Special  properties  of  gold  and  silver  which 
qualify  them  for  the  monetary  function — Their  defects  for  the 
purpose Page  70 

VI 
PRODUCTION  OF  THE  PRECIOUS  METALS 

Bearing  of  the  statistics  of  production  on  economic  problems — 
Early  history  of  gold  and  silver  mining — Origin  of  the  fable  of 
the  golden  fleece — Mines  of  Greece,  Thrace,  Egypt,  and  Spain — 
Decline  of  mining  during  the  Middle  Ages — Eagerness  of  Co- 
lumbus and  his  successors  to  find  gold  and  silver — Ultimate 
success  in  Mexico  and  Peru — The  modern  discoveries  in  Cali- 
fornia, Australia,  and  South  Africa — Changes  in  ratio  of  pro- 
duction of  the  metals ,  Page  89 

X 


CONTENTS 

VII 
THE  METALS  AND  THE  MONEY  SUPPLY 

The  vital  question  whether  the  stock  of  gold  and  silver  is  adequate 
for  monetary  demands — Existing  stock  of  gold  money — Annual 
consumption  of  gold  in  the  arts — Amount  lost  by  abrasion — 
Amount  of  gold  and  silver  swallowed  up  in  the  East — Rapid  in- 
crease in  recent  years  of  net  gold  production  annually  available 
for  money — History  of  the  decline  in  the  gold  price  of  silver — 
Early  fears  of  inadequacy  of  the  gold  supply — Is  there  now 
danger  of  an  excessive  supply? Page  95 

VIII 
THE  PRINCIPLES  OF  COINAGE 

Meaning  and  origin  of  coinage — Relationship  between  coin  and 
bullion — Significance  of  free  coinage  of  the  standard  metal — 
Does  not  necessarily  involve  gratuitous  coinage — Abuse  of 
seigniorage  charges  in  early  times — Influence  of  government 
control  over  quantity  of  coins  in  maintaining  their  exchange 
value — Status  of  coins  and  bullion  in  foreign  trade — Subsidiary 
coins  not  subject  to  same  rules  as  standard  coins  .  Page  112 

IX 

THE  EVOLUTION  OF  OFFICIAL  COINAGE 

The  first  coinage  by  individuals  or  small  communities — Efforts  of 
the  mediaeval  governments  to  acquire  the  privilege  from  the 
seigneurs — The  work  of  private  mints  in  Maryland,  North 
Carolina,  and  California — Reasons  for  coinage  under  govern- 
ment authority — Necessity  for  guarantees  of  uniform  weight 
and  fineness — Evolution  of  modern  coinage  systems  from  units 
of  weight — The  American  and  Mexican  dollar  .  Page  127 


BOOK  II 
THE    PRINCIPLES    OF   THE    VALUE    OF    MONEY 

I 
THE  IMPORTANCE  OF  DEFINITIONS 

Many  controversies  on  the  value  of  money  have  been  caused  by 
the  use  of  terms  in  ambiguous  or  double  senses — The  meaning 

xi 


CONTENTS 

of  value  in  relation  to  money  —  Proper  use  and  limited  sig- 
nificance of  "appreciation"  and  "depreciation"  of  gold  — 
Different  interpretations  of  value — In  what  respect  is  stabil- 
ity desirable  in  the  value  of  money,  in  exchange  value,  labor 
value,  or  utility  value  ?  —  Significance  of  the  quantity  theory 
of  value Page  147 


II 
HOW  THE  VALUE  OF  MONEY  IS  DETERMINED 

Qualifications  of  the  quantity  theory — Changes  in  the  monetary 
stock  affect  first  those  goods  most  sensitive  to  price  changes 
and  foreign  demand — Prices  of  commodities  determined  by 
their  marginal  utility  with  reference  to  one  another — Influence 
of  rates  of  discount  and  money  reserve  requirements — Im- 
portance of  the  intensity  of  demand  for  particular  goods — 
How  it  affects  their  prices  in  gold  ......  Page  160 

III 
HOW   CREDIT    INFLUENCES   THE   VALUE    OF   MONEY 

Introduces  new  complications  into  the  quantity  theory — Credit 
instruments  largely  the  product  of  transactions — How  foreign 
banking  credits  provide  a  medium  of  exchange  without  move- 
ment of  gold — Discount  rates  not  uniformly  dependent  upon 
stock  of  metallic  money — How  changes  in  conditions  of  credit 
may  offset  changes  in  money  supply — The  marginal  demand 
for  gold  to  settle  balances Page  180 

IV 
THE  RELATION  OF  MONEY  TO  PRICES 

Changes  in  the  quantity  of  money  bear  but  a  small  ratio  to  the 
total  stock — Efforts  to  ascertain  fluctuations  in  value  of  money 
by  index  numbers — Difficulties  and  pitfalls  of  the  method — In- 
fluences which  have  reduced  gold  prices — Fall  in  labor-cost  of 
commodities  resulting  from  machinery — Reduced  cost  of  trans- 
portation to  central  markets — The  rise  in  gold  wages — Influence 
of  increased  activity  in  business  and  of  more  rapid  movement  of 
credits — Summing  up Page  198 


CONTENTS 

V 

THE  PRINCIPLES  OF  FOREIGN  EXCHANGE 

A  means  of  discharging  debts  due  abroad — 'How  exchange  pre- 
vents needless  counter-shipments  of  gold — Value  of  bills  of 
exchange  subject  to  rule  of  supply  and  demand  —  Usually 
within  the  limits  of  the  cost  of  shipping  gold — Meaning  of 
"par  of  exchange" — Difference  between  commercial  bills  and 
bankers'  bills — Why  the  larger  proportion  of  bills  is  drawn  on 
London — Arbitrage  and  indirect  exchange  .  .  .  Page  223 

VI 
THE  DISTRIBUTION  OF  MONEY 

Governed  by  the  principle  of  marginal  utility — How  the  same 
principle  governs  distribution  of  capital — Demand  in  a  com- 
munity for  money  may  yield  to  demand  for  other  things — 
How  new  money  is  distributed — How  a  sound  monetary  system 
may  be  supported  by  borrowing — Quantity  of  money  needed  in 
a  country — Difference  between  discount  rates  and  interest  rates 
—Why  they  vary  in  different  markets  ....  Page  245 

BOOK  III 
THE    EVOLUTION    OF    MONETARY    SYSTEMS 

I 
TYPES  OF  CURRENCY  SYSTEMS 

Seven  principal  forms  of  metallic  and  paper  money — Significance 
of  the  single  metallic  standard — The  scientific  meaning  of  bi- 
metallism— The  "ratio"  between  gold  and  silver — Develop- 
ment of  the  gold  exchange  standard — Redeemable  government 
paper — Defects  of  such  paper  when  irredeemable — Character 
of  modern  bank-note  issues — How  these  systems  are  combined 
in  various  ways  in  modern  civilized  states  .  .  .  Page  275 

II 
THE  FAILURE  OF  LOCAL  BIMETALLISM 

Its  relation  to  the  introduction  of  the  gold  standard — The  French 
legislation  of  1803,  making  the  franc  the  coinage  unit — Ebb 

xiii 


CONTENTS 

and  flow  of  gold  across  the  French  frontier  under  changing  re- 
lations in  the  bullion  market — Formation  of  the  Latin  Union  to 
guard  against  the  rise  of  silver — Change  of  conditions  about 
1873 — Policy  of  the  United  States  regarding  the  standard — The 
legislation  of  1873  and  the  Bland  and  Sherman  acts  .  Page  294 

III 
EVOLUTION  OF  THE  GOLD  STANDARD 

A  natural  result  of  the  failure  of  local  bimetallism — Tendency  of 
wealthy  societies  to  ernploy  the  more  valuable  metal — Effect 
of  the  increase  in  the  supply  of  gold  after  1850 — Early  history  of 
relations  between  gold  and  silver — The  international  monetary 
conference  of  1867 — Movements  in  favor  of  gold  in  France, 
Germany,  Austria,  Russia,  and  other  countries — The  Gold 
Standard  Act  of  1900  in  the  United  States  .  .  .  Page  316 

IV 
THE  DISLOCATION  OF  THE  EXCHANGES 

Difficulties  in  trade  between  gold  and  silver  standard  countries 
caused  by  fluctuations  in  the  gold  price  of  silver — Relations  of 
the  annual  production  of  silver  to  the  general  stock — Did  falling 
exchange  stimulate  exports  from  silver  countries  ? — If  so,  was 
such  a  stimulus  an  economic  gain  ? — Facts  seem  to  demonstrate 
the  contrary  in  India,  Mexico,  and  China — The  demand  for  a 
remedy  for  the  fluctuations  of  exchange  .  .  .  Page  339 

V 
THE  EFFORT  FOR  INTERNATIONAL  BIMETALLISM 

Importance  of  securing  agreement  among  leading  nations — Dif- 
ficulties in  the  way — Tendency  of  the  cheaper  metal  to  drive 
out  the  dearer — Operation  of  the  principle  of  substitution — 
Too  much  reliance  placed  by  bimetallists  on  statute  law — • 
Difficulties  caused  by  differences  in  national  ratios  and  by  the 
decline  in  silver — Efforts  of  international  conferences  prove 
futile  in  1878,  1881,  and  1892 — The  mission  of  Senator  Wolcott 
in  1897 Page  355 

VI 

EVOLUTION  OF  THE  GOLD-EXCHANGE  STANDARD 

A  new  method  of  approaching  the  problem  of  stable  exchange 
between  gold  and  silver  countries — How  events  forced  the  limp- 

xiv 


CONTENTS 

ing  standard  upon  France,  British  India,  and  the  United  States 
— How  it  was  adapted  by  proper  changes  to  the  needs  of  silver- 
using  countries — The  monetary  system  of  the  Philippine  Islands 
— Methods  of  maintaining  parity — Adoption  of  similar  systems 
in  Panama  and  Mexico — The  problem  of  stable  exchange  with 
China Page  374 

VII 

OPERATION  OF  THE  EXCHANGE  STANDARD 

A  result  of  economic  conditions — Difficulties  in  practical  operation 
under  the  old  coinage  ratios — Relative  adaptability  of  silver 
money  in  the  Orient  and  Occident — Danger  of  excessive  issues 
of  silver — Advantages  of  the  exchange  standard  in  diminishing 
pressure  for  gold — In  restoring  stability  of  exchange — Effect 
upon  the  market  for  silver  bullion — Analogy  of  the  exchange 
standard  to  bimetallism — Its  greater  practicability  .  Page  388 

VIII 
THE  THEORY  OF  GOVERNMENT  PAPER  MONEY 

Such  money  usually  inconvertible  and  made  a  forced  legal  tender 
— From  what  sources  it  derives  its  value — Government  cannot 
create  value,  but  can  create  a  limited  demand  for  paper  money 
by  making  it  legal  means  of  payment — Limited  influence  of 
accepting  paper  for  public  dues — Why  needy  governments  are 
tempted  to  issue  paper — Unfortunate  experience  of  the  United 
States  with  the  greenbacks — Many  evils  which  flow  from  paper 
issues Page  404 

IX 

HOW  THE  VALUE  OF  GOVERNMENT  PAPER  IS 
DETERMINED 

Not  subject  directly  to  the  international  movements  of  gold — In- 
fluence of  the  principle  of  demand  and  supply — Factors  which 
affect  demand  —  Confidence  in  redemption  at  par  —  Fluctua- 
tions of  the  greenbacks  during  the  Civil  War — Influence  of  the 
foreign  exchanges — Experiences  of  Brazil  and  the  Argentine 
Republic — Effect  of  depreciated  paper  on  prices  and  exports 
— Governments  not  fitted  to  regulate  and  maintain  the  paper 
currency Page  422 

XV 


BOOK  I 
THE    EVOLUTION    OF    MODERN    MONEY 


THE  PRINCIPLES  OF 
MONEY   AND    BANKING 

BOOK    I 

I 

THE  PLACE  OF  MONEY  IN  ECONOMICS 

Definition  of  money  here  limited  to  metal  of  intrinsic  value — 
Other  means  of  exchange  properly  defined  as  "currency" — 
Conflicting  views  of  the  money  function  —  The  economic  im- 
portance of  money — Application  of  economic  principles  to  mone- 
tary events — How  the  use  of  money  promoted  division  of  labor 
and  emancipation  of  the  laborer  from  the  soil — Money,  how- 
ever, only  one  of  many  factors  affecting  economic  conditions. 

THE  origins  of  the  English  word  money  go  back  to 
the  first  coinage  of  silver  in  Rome.  It  is  told  by 
Livy  how  the  first  regular  mint  was  established  at  the 
capitol,  in  the  neighborhood  of  the  temple  of  the  Goddess 
Juno  Moneta — so  called  from  the  Latin  moneta  (a  warn- 
ing), because  the  goddess  had  there  revealed  to  Manlius 
the  assault  of  the  Gauls.  One  of  the  early  Roman  coins 
bore  on  one  side  the  head  of  the  goddess,  with  her  name, 
Moneta,  and  on  the  reverse  the  instruments  of  coinage. 
Gradually  the  name  passed  to  the  product  of  the  mint, 
and  finally  this  product,  the  coinage,  was  itself  personi- 
fied as  a  goddess,  Moneta,  and  even  three  Moneta  came 
to  be  recognized  as  guardians  of  the  three  metals — 

3 


THE:  PRINCIPLES  OF  MONEY  AND  BANKING 

gold,  silver,  and  copper — from  which  Roman  money  was 
coined.1 

The  definition  of  money  which  will  be  adopted  in  this 
work  is  that  commodity  of  intrinsic  value  acceptable  in 
exchanges  which  has  become  by  law  or  custom  the  usual 
tender  for  debt. 

Put  into  more  popular  language,  this  means  that  the 
term  money,  under  existing  social  conditions,  is  applicable 
to  gold  or  silver  coin,  and  should  not  be  extended  to  the 
various  forms  of  paper  which  economize  the  use  of  money. 
For  most  practical  purposes,  gold  bullion  held  in  bank 
reserves  is  properly  classed  as  money,  and  falls  within 
the  definition  given.  It  will  be  seen  hereafter  that  in 
the  actual  use  of  money  in  domestic  transactions  the 
coinage  of  the  metals  is  an  important  factor;  but  in  for- 
eign trade  bullion  is  quite  as  useful  as  coin,  and  in  do- 
mestic use  bullion  in  bank  reserves  may  be  said,  in  a 
sense,  to  be  serving  the  purposes  of  coined  and  circulat- 
ing money  through  its  paper  representatives. 

The  use  of  the  word  money  is  extended  by  many  au- 
thorities to  different  forms  of  credit  obligations — by  some 
to  redeemable  government  paper  or  redeemable  bank- 
notes ;  by  others  to  irredeemable  paper  of  either  type ;  and 
by  still  others  to  the  checks,  deposit  entries,  and  various 
written  instruments  which  are  employed  in  carrying  on 
exchanges.  The  difficulty  about  these  extensions  of  the 
definition  beyond  coined  metal  of  intrinsic  value  is  that 
there  is  no  logical  point  at  which  the  things  included  in 
the  definition  of  money  terminate.  If  the  definition  is 
extended  to  instruments  of  paper  credit,  it  is  not  clear 
why  it  should  stop  with  legal-tender  instruments  and  fail 
to  include  bank-notes  which  are  not  legal  tender.  If  it 
is  extended  to  the  latter,  it  is  not  clear  why  it  should  not 
extend  also  to  foreign  bills  of  exchange,  which  are  kept 
by  many  of  the  European  banks  as  a  part  of  their  coin 

1  Lenormant,  La  Monnaie  dans  I'Antiquitt,  I.,  p.  83. 
4 


THE    PLACE    OF    MONEY    IN    ECONOMICS 

reserves,  ready  to  be  sold  for  coin  whenever  they  have 
need  for  it. 

In  popular  usage  there  is,  perhaps,  no  serious  objection 
to  extending  the  term  "money"  to  the  instruments  of 
daily  circulation,  but  for  scientific  purposes  it  is  much 
better  that  it  should  be  limited  in  tangible  and  definite 
manner,  and  its  use  will  be  so  limited  in  this  work.  There 
are  several  other  terms  of  general  application,  among 
which  "currency"  may  be  held  to  apply  to  the  ordinary 
instruments  of  circulation  which  pass  without  endorse- 
ment, and  "cash"  has  a  still  more  indefinite  meaning, 
which  extends  to  all  the  loanable  capital  in  the  hands  of 
banks  or  subject  to  repayment  to  them  at  call.1 

The  definition  of  money  above  given  conforms  in  prin- 
ciple to  that  of  the  best  authorities  on  the  subject,  in  re- 
quiring money  to  have  intrinsic  value,  or  to  represent 
intrinsic  value.  A  certain  class  of  definitions  make  only 
slight  changes  in  the  emphasis  laid  upon  certain  phases 
of  this  definition.2  There  is,  however,  another  class  of 
definitions  of  money  which  treat  it  only  as  a  symbol  or 
ticket,  equally  effective  for  the  purpose  of  carrying  on 
exchanges  without  possessing  intrinsic  value.  This  view 
is  expressed,  though  not  adopted,  by  Gide,  in  the  declara- 
tion that  "Every  piece  of  money  should  be  considered  as 
a  bond  issued  against  the  aggregate  of  existing  wealth, 
and  giving  the  right  to  the  bearer  to  have  delivered  to 
him  any  portion  whatever  of  this  wealth,  at  his  option,  to 

1  Speaking  of  the  London   "money    market,"   Sidgwick  says, 
"But  if  we  ask  ourselves  where  and  in  what  form  this  'cash' 
exists,  it  must  be  evident  that,  at  any  given  time,  most  of  it 
exists  only  in  the  form  of  liabilities  or  obligations,  acknowledged 
by  rows  of  figures  in  the  bankers'  books ;  and  that  it  is  transferred 
from  owner  to    owner,   and  thus  fulfils   all   the  functions  of  a 
medium  of  exchange,  without  ever  assuming  a  more  material 
shape." — The  Principles  of  Political  Economy,  p.  227. 

2  Upon    this    principle   is    based    the    definition    of   Chevalier: 
"Money  is  an  instrument  which  serves  as  a  measure  in  exchanges 
and  is  in.  itself  an  equivalent." — La  Monnaie,  p.  i. 

5 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

the  amount  of  the  value  of  the  piece."  *  In  so  far  as  this 
theory  ignores  the  necessity  for  intrinsic  value  in  the  ma- 
terial of  money,  it  is  likely  to  lead  to  grave  errors. 

It  may  be  a  sound  theoretical  conception,  as  expressed 
by  Walker,  that  values  of  different  articles  can  be  com- 
pared through  a  common  denominator,  having  no  value 
in  itself ;  but  such  a  measure  cannot,  in  the  nature  of  the 
case,  be  a  standard  of  value.  An  article  used  as  money, 
in  order  to  have  stability  of  value  sufficient  to  make  it  a 
safe  measure  of  other  things,  must  itself  have  intrinsic 
value.  The  reason  for  confusion  of  thought  on  this  sub- 
ject lies  partly  in  the  fact  that  money  is  chiefly  employed 
as  an  instrumental  commodity  instead  of  ministering 
directly  to  consumption.  As  Pantaleoni  declares,  "  Money 
is  in  a  paramount  degree  an  instrumental  commodity,  not 
only  because  its  function  is  solely  and  exclusively  instru- 
mental, but  further  because  it  discharges  that  function 
without  the  aid  of  any  complementary  commodity."  2  Be- 
cause money  thus  stands  between  other  commodities  as 
an  instrument  for  exchanging  them,  it  has  acquired  a 
peculiar  status,  which  Marx  thus  analyzes:3 

"  We  have  seen  that  the  money -form  is  but  the  reflex, 
thrown  upon  one  single  commodity,  of  the  value  relations 
between  all  the  rest.  That  money  is  a  commodity  is, 
therefore,  a  new  discovery  only  for  those  who,  when  they 
analyze  it,  start  from  its  fully  developed  shape.  The  act 
of  exchange  gives  to  the  commodity  converted  into  money, 
not  its  value,  but  its  specific  value-form.  By  confounding 
these  two  distinct  things  some  writers  have  been  led  to 
hold  that  the  value  of  gold  and  silver  is  imaginary.  The 
fact  that  money  can,  in  certain  functions.be  replaced  by 
mere  symbols  of  itself,  gave  rise  to  that  other  mistaken 

1  Principes  d'Economie  Politique,   p.    218.      Roscher    declares, 
"The  person  who  takes  money  as  such  must  always  harbor  the 
hope  of  being  able  to  dispose  of  it  again  as  money." — Political 
Economy,  I.,  p.  351. 

2  Pure  Economics,  p.  221.  'Capital,  p.  62. 

6 


THE    PLACE    OF    MONEY    IN    ECONOMICS 

notion,  that  it  is  itself  a  mere  symbol.  Nevertheless 
under  this  error  lurked  a  presentiment  that  the  money- 
form  of  an  object  is  not  an  inseparable  part  of  that  ob- 
ject, but  is  simply  the  form  under  which  certain  social 
relations  manifest  themselves.  In  this  sense  every  com- 
modity is  a  symbol,  since,  in  so  far  as  it  is  value,  it  is 
only  the  material  envelope  of  the  human  labor  spent 
upon  it." 

The  study  of  money  is  only  a  part  of  the  science  of 
economics,  but  it  is  at  once  an  important  part,  and  one 
whose  principles  can  be  more  definitely  ascertained  and 
clearly  laid  down  than  those  of  many  other  branches  of 
the  science.  In  matters  relating  to  money  the  hypo- 
thetical assumptions  of  deductive  reasoning  are  more 
uniformly  borne  out  by  events  than  in  almost  any  other 
field.  "The  economic  man,"  acting  uniformly  under  the 
play  of  the  motive  of  enlightened  self-interest,  is  a  more 
constant  factor  in  monetary  problems  than  in  those  aris- 
ing in  other  fields  in  which  individual  characteristics, 
prejudices,  and  motives,  political,  sentimental,  and  moral, 
come  into  play  to  modify  the  operation  of  the  motive  of 
self-interest.  The  limitation  is  true  of  monetary  matters 
in  fewer  cases  than  of  other  economic  problems,  which  is 
presented  by  Cairnes : * 

"There  are  few  practical  problems  which  do  not  pre- 
sent other  aspects  than  the  purely  economical — political, 
moral,  educational,  artistic  aspects — and  these  may  in- 
volve consequences  so  weighty  as  to  turn  the  scale  against 
purely  economic  solutions." 

The  so-called  laws  of  economic  science  are  based  upon 
reasonable  deduction  as  to  the  action  of  the  economic 
man  under  the  operation  of  the  motive  of  self-interest. 
They  are  not  natural  laws  in  any  such  sense  as  the  laws 
of  physics.  They  depend  primarily  upon  individual  ac- 
tion and  initiative.  Being  the  result  of  psychic  ten- 

1  Character  and  Logical  Method  of  Political  Economy,  p.  37. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

dencies,  they  are  subject  to  the  variations  of  individual 
judgment  and  conflict  of  motive.  With  some  allowance 
for  these  variations,  however,  the  action  of  the  average 
man  in  matters  affecting  his  pocket  follows  lines  which 
can  be  calculated  with  reasonable  precision.  The  cham- 
pions of  particular  dogmas  in  monetary  matters  some- 
times set  up  their  maxims  as  "natural  laws,"  and  char- 
acterize any  other  proposals  as  unnatural  or  artificial. 
Such  a  distinction,  however,  is,  in  the  nature  of  the  case, 
one  of  degree  and  not  of  kind. 

Existing  monetary  systems  in  civilized  countries  rest 
upon  legislation.  The  only  monetary  system  which  would 
be  "natural,"  even  in  a  restricted  sense,  would  be  that 
in  which  the  precious  metals  should  be  exchanged  as  com- 
modities by  weight  and  assay,  without  the  intervention 
of  the  state  to  stamp  them  as  coins,  to  determine 
their  purity,  or  to  give  them  any  distinctive  character 
as  money.  The  discussion  of  any  particular  monetary 
system  or  project,  therefore,  cannot  turn  absolutely  upon 
the  question  whether  it  is  "natural"  or  "artificial,"  but 
whether  it  conforms  most  nearly  to  the  requirements  of 
commercial  society  in  its  existing  stage  of  progress,  in 
view  of  the  recognized  motives  of  self-interest  which 
govern  men  in  commercial  affairs.  The  dominant  mo- 
tive of  self-interest  is  so  strong  that  it  creates  tendencies 
which  the  state  cannot  prudently  attempt  to  override, 
but  if  legislation  is  so  framed  as  to  follow  the  lines  of 
least  resistance,  by  the  adoption  of  laws  whose  successful 
working  conforms  to  the  self-interest  of  the  citizen,  then 
monetary  systems  may  be  strongly  influenced  by  govern- 
mental action. 

Within  such  limits  as  protect  the  individual  against 
needless  fraud,  and  promote  the  convenience  of  the  mass 
of  men,  free  play  should  undoubtedly  be  given  in  matters 
relating  to  money  to  the  tendencies  of  individual  self- 
interest.  Only  by  the  free  play  of  those  tendencies,  on 
the  one  hand,  or  the  subtle  evasion  of  attempts  to  counter- 

8 


THE    PLACE    OF   MONEY    IN    ECONOMICS 

act  them  by  law,  have  developed  those  principles  of 
monetary  science  which  have  made  money  and  its  paper 
representatives  the  delicate  and  effective  instrument 
which  they  have  become  after  centuries  of  experimenta- 
tion in  the  substitution  of  money  payments  for  barter,  in 
the  promotion  of  international  trade,  in  the  division  of 
labor,  in  the  consecration  of  the  economic  freedom  of  the 
individual,  and,  finally,  in  the  economic  and  political  prog- 
ress of  civilized  communities. 

In  the  simplest  form  of  existence  there  was  no  demand 
for  money,  because  there  was  practically  no  exchange  of 
goods.  There  was  not  even  an  organization  of  society 
on  an  economic  basis,  if  (as  Bucher  declares)  "an  econ- 
omy supposes  the  management  of  property,  the  care  for 
the  future  as  well  as  the  present,  a  distribution  of  time 
intelligently  employed;  economy  signifies  labor,  the 
valuation  of  objects,  the  regulation  of  their  consumption, 
the  ascent  from  generation  to  generation  of  the  conquests 
of  civilization."  l  Gradually,  exchanges  of  services  and 
products,  to  meet  special  emergencies  in  primitive  society, 
led  to  direct  exchange  of  surplus  goods  for  each  other. 
This  advance  from  the  first  forms  of  barter  to  the  use  of 
coined  money  involved  a  process  of  evolution  which  ex- 
tended over  many  centuries. 

As  the  refinement  of  production  and  civilization  in 
mediaeval  society  gradually  led  to  the  gathering  of  artisans 
in  towns,  a  system  of  exchange  developed  between  the 
town  and  the  surrounding  country  which  affected  more 
deeply  than  previous  exchanges  the  fundamental  eco- 
nomic life  of  the  community.  Special  markets  grew  up, 
where  a  great  mass  of  exchanges  were  set  off  against  each 
other  without  large  demands  for  money.  They  were, 
however,  expressed  in  terms  of  money,  which  was  the 
measure  of  value  of  tributes,  taxes,  and  presents,  even 
when  these  payments  were  actually  made  in  kind.2  The 

1  Etudes  d'Histoire  et  d'Economie  Politique,  p.  35. 

2  Bucher,  p.  72. 

9 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

substitution  of  money  payments  for  services  in  kind 
tended  to  sever  the  relations  between  master  and  man 
and  pave  the  way  for  economic  freedom.  As  Cunning- 
ham has  pointed  out:  * 

"When  payment  is  made  in  kind,  in  return  for  service 
rendered,  the  laborer  has  little  choice  as  to  the  form  in 
which  he  will  take  his  earnings,  and  no  choice  as  to  the 
time  of  labor ;  when  he  works  for  wages  he  is  free  to  choose 
his  own  way  of  spending  his  earnings,  and  free  to  decide 
whether  he  will  work  on  the  terms  offered  and  for  the 
time  specified,  or  no.  This  is  a  step  in  advance  because 
it  opens  up  possibilities  of  progress,  and  of  rising  in  the 
world,  though  the  wage-earner  does  not  necessarily  en- 
joy increased  comfort.  .  .  .  Freedom  to  migrate,  freedom 
to  change  employment,  freedom  to  work  or  not  and  to 
spend  what  he  earns  as  he  likes,  are  important  elements 
in  personal  independence ;  and  these  only  became  possible 
as  the  consequences  of  the  introduction  of  money  taxa- 
tion, the  capital  of  moneyed  men,  and  the  payment  of 
wages  in  money.  In  the  Athens  of  the  time  of  Pericles 
these  conditions  were  so  far  introduced  and  a  consider- 
able number  of  the  inhabitants  had  secured  such  economic 
independence,  that  they  were  able  to  enjoy  a  personal 
political  freedom,  such  as  was  impossible  in  the  ancient 
Egypt  or  in  Phoenicia." 

The  effect  of  a  medium  of  exchange,  not  only  in  per- 
mitting exchanges,  but  in  stimulating  production  and 
adapting  it  to  every  human  need,  has  been  thus  defined 
by  Tucker: 2 

"As  every  article  has  its  known  market  price  in  the 
general  measure  of  value,  where  there  is  one,  every  pro- 
ducer can  thereby  better  adapt  his  supply  to  the  varying 
demands  and  diversified  tastes  of  the  community.  Money 
furnishes  a  very  sensitive  barometer  of  these  variations, 

1  Western  Civilization,  I.,  p.  95. 

3  The  Tlteory  of  Money  and  Banks  Investigated,  p.  14. 
10 


THE    PLACE    OF    MONEY    IN    ECONOMICS 

by  consulting  which  the  industrious  classes  will  be  less 
likely  to  misdirect  their  labor,  and  create  redundancy  on 
the  one  hand,  or  subject  the  community  to  scarcity  on 
the  other.  Where  the  value  of  the  articles  produced  had 
to  be  exchanged  some  three  or  four  times  before  the  pro- 
ducer obtained  what  he  wanted,  it  would  not  be  easy  to 
say  what  was  the  market  value  of  his  commodity.  The 
knowledge,  at  least,  would  be  far  less  prompt,  easy,  and 
precise,  than  it  is  where  there  is  a  general  measure  of 
value. 

"The  introduction  of  money  has  also  a  manifest  ten- 
dency to  beget  frugality,  and  encourage  accumulation. 
Without  such  a  convenient  and  unchanging  representa- 
tive value,  or  mode  of  investment,  many  things  would 
be  wastefully  consumed,  supposing  them  to  be  produced, 
which  would  be  saved,  if  convertible  into  money,  instead 
of  being  exchangeable  merely  for  other  merchandise." 

The  last  point  made  by  Tucker  is  put  in  even  stronger 
terms  by  Roscher,  when  he  says:1 

"Only  when  money  has  become  the  instrument  of 
trade,  is  it  possible  to  separate  the  net  from  the  gross 
returns,  and,  therefore,  to  manage  income  properly 
(Schaffle).  Now,  also,  it  becomes  for  the  first  time  really 
remunerative  to  produce  more  than  one  needs  for  his 
own  use,  and  to  save.  Without  money,  the  owner  of  any 
one  kind  of  capital,  who  could  not  employ  it  himself, 
would  be  obliged,  if  he  desired  to  loan  it,  to  find  not  only 
a  person  who  was  in  need  of  capital,  but  one  who  needed 
the  very  kind  of  capital  he  had." 

Hence  the  introduction  of  any  article  as  money,  having 
the  qualities  of  durability,  transportability,  and  divisibil- 
ity, marked  an  important  economic  revolution  in  society. 
In  ancient  society,  organized  upon  the  basis  of  slavery, 
there  was  no  great  demand  for  money  for  the  actual  pur- 
poses of  exchange  except  in  the  cities  and  in  foreign 

1  Principles  of  Political  Economy,  I.,  p.  348. 
ii 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

trade.  It  was  the  same  with  mediaeval  society.  "The 
feudal  lord,"  Guyot  truly  declares,  "could  not  sell  his 
oats,  his  game,  nor  his  cattle.  If  he  had  wide  lands  he 
was  not  able  to  distribute  their  products  abroad.  It  was 
necessary  then  that  he  should  consume  his  products  where 
they  were  produced,  and  thus  he  created  around  him  a 
clientage  which  he  supported  and  from  which  he  demand- 
ed all  sorts  of  services."  1 

St.  Paul's  Cathedral  presented  a  typical  illustration  of 
the  mediaeval  economy.  Adjoining  the  cathedral  was 
the  horse-mill,  a  bake-house,  and  a  brewery,  where  the 
grain  was  ground,  bread  was  baked  five  times  a  fortnight, 
and  beer  was  brewed  twice  a  week  under  the  supervision 
of  the  warden  of  the  brew-house.2  It  was  thus  that  both 
secular  and  religious  society  was  organized  in  the  Middle 
Ages.  It  was  only  gradually  that  payments  were  com- 
muted into  terms  of  money — payments  to  the  state,  to  the 
barons,  and  to  the  heads  of  the  religious  houses.  In  the 
early  days  of  England,  after  the  Conquest,  the  kings  used 
to  receive  from  their  manors  certain  quantities  of  pro- 
visions for  supplying  the  daily  necessities  of  the  royal 
household.  The  royal  officials  knew  precisely  from  what 
counties  were  due  wheat,  various  kinds  of  flesh,  proven- 
der for  horses,  and  other  necessities.  Money  was  then  em- 
ployed for  the  payment  of  soldiers  and  for  certain  other 
purposes  and  was  the  standard  for  reckoning  the  value  of 
the  taxes  paid  in  kind.  As  early  as  the  times  of  Alfred  and 
Ethelred  in  England,  tenants  sometimes  paid  in  money, 
and  the  tax  levied  for  the  Danegeld,  or  tribute  to  the  Danes, 
was  collected  in  money.8  But  it  was  only  some  time  after 
the  Conquest,  when  Henry  I.  was  obliged  to  cross  the  sea 
to  suppress  the  insurrection  in  France,  that  the  need  of 
coined  money  began  to  be  keenly  felt. 

It  was  in  England  that  money  payments  first  generally 

1  L'Economie  de  I' Effort,  p.  35. 

1  Ashley,  English  Economic  History  and  Theory,  I.,  p.  45. 

1  Bry,  Histoire  Industrielle  et  Economique  de  I'Angleterre,  p.  13. 

12 


THE    PLACE    OF    MONEY    IN    ECONOMICS 

took  the  place  of  services,  and  it  was  by  the  use  of  money, 
in  connection  with  other  causes,  that  Englishmen  were 
able  to  secure  the  freedom  of  the  individual  and  the  pos- 
sibility of  modern  industrial  development.  The  laborer 
was  no  longer  bound  to  the  parish  in  which  he  was  born, 
but  could  seek  a  free  market  for  his  labor  where  his  special 
skill  would  command  the  highest  pay.  What  the  results 
were  to  English  industry  is  thus  set  forth  by  Marshall:  * 

"Freedom  of  industry  and  enterprise,  so  far  as  its 
action  reaches,  tends  to  cause  every  one  to  seek  that  em- 
ployment of  his  labor  and  capital  in  which  he  can  turn 
them  to  best  advantage;  and  this  again  leads  him  to  try 
to  obtain  a  special  skill  and  facility  in  some  particular 
task,  by  which  he  may  earn  the  means  of  purchasing  what 
he  himself  wants.  And  hence  results  a  complex  indus- 
trial organization,  with  much  subtle  division  of  labor." 

Even  in  modern  times,  as  we  shall  see  hereafter,  the 
substitution  of  money  payments  for  the  truck  system 
has  put  an  end  to  abuses  in  the  relation  of  employer  and 
laborer.  In  England  severe  limits  were  put  upon  the 
use  of  the  truck  system  by  the  Truck  Act  of  1831,  which 
forbade  the  payment  of  workmen  wholly  or  in  part  by 
goods,2  and  in  the  manufacturing  states  of  North  America 
similar  legislation  soon  followed.  Under  the  old  system 
the  chief  evil  was  not  merely  that  those  who  lived  under 
it  were  required  to  pay  unreasonably  high  prices,  but 
that  they  were  not  free  to  buy  where  and  as  they  pleased. 
They  had  not  the  power  which  is  given  by  ready  money 
of  asserting  their  economic  independence.  The  diffusion 
of  the  use  of  money,  therefore,  has  represented  one  of  the 
essential  steps  in  the  progress  of  civilization.  In  our  own 
day,  the  substitution  of  coined  money  for  pieces  passing 
by  weight  is  one  of  the  first  measures  generally  regarded 
as  essential  in  opening  China  to  modern  ideas.  As  de- 
clared elsewhere  by  the  present  writer : 3 

1  Principles  of  Economics,  I.,  p.  39.  *  Sykes,  p.  4. 

1  Wall  Street  and  the  Country,  p.  173. 

13 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

"With  the  unification  of  national  economic  life,  which 
will  come  to  China  with  the  extension  of  railways,  must 
inevitably  come,  also,  many  other  elements  of  Western 
civilization.  Among  these  will  be  the  use  of  money  and 
the  adoption  of  modern  methods  of  credit.  Wherever  a 
railway  is  in  process  of  construction,  coined  money  will  be 
required  for  buying  the  products  of  the  country  and  pay- 
ing wages.  Wherever  a  railway  is  in  operation,  money 
will  be  the  only  practical  medium  for  paying  freights." 

In  spite  of  the  important  and  essential  part  which 
money  plays  in  the  economy  of  modern  society,  the  mis- 
take should  not  be  made  by  the  student  of  looking  upon 
money  as  the  unique  cause  of  economic  changes.  While 
disturbances  in  the  currency  system  play  an  important 
part  in  industrial  economy,  the  normal  movements  of  a 
metallic  currency  are  not  so  likely  to  be  the  causes  of 
economic  changes  as  to  be  the  visible  manifestations  of 
such  changes.  The  student  of  the  fascinating  subject  of 
money  should  avoid  the  error  of  believing  that  money  is 
itself  the  controlling  element  in  the  production  and  ex- 
change of  commodities.  Other  things  being  equal,  it  is 
fair  to  assume  that  the  prosperity  of  a  nation  will  depend 
upon  the  productive  efficiency  of  its  labor,  and  that  this 
labor  will  exchange  for  an  equivalent  in  the  labor  of  other 
persons  and  other  lands,  influenced  only  in  part  by  changes 
in  the  medium  of  exchange  in  which  such  transactions 
are  made. 

There  will  be  occasion  in  this  work  to  refer  to  many 
cases  in  which  changes  in  monetary  laws  and  the  move- 
ments of  money  have  been  related  to  other  important 
economic  events.  In  some  cases  they  have  been  the 
causes  of  such  events,  but  in  many  others  only  the  visible 
and  conspicuous  sign  of  disturbances  due  to  other  causes. 
Such  theories  as  those  of  Sir  Archibald  Alison,  in  his  His- 
tory of  Europe,  that  the  fall  of  the  Roman  Empire  was 
due  to  the  deficiency  of  the  precious  metals,  are  exag- 
gerations of  the  part  which  the  metals  play  in  exchange. 


THE    PLACE    OP    MONEY    IN    ECONOMICS 

If  the  people  of  the  Roman  Empire  continued  to  possess 
the  same  energy  and  productive  efficiency  and  the  same 
avenues  for  distributing  their  goods  at  a  later  date  which 
they  possessed  at  an  earlier  one,  there  is  no  reason  to  be- 
lieve that  the  gradual  decline  of  the  volume  of  the  pre- 
cious metals  over  a  long  period  of  years  would  in  itself 
have  paralyzed  their  economic  progress. 

Whatever  the  merits  of  the  question  involved,  the 
money  supply  could  be  only  one  of  many  factors  in  a  con- 
stantly changing  economic  situation,  in  which  the  inter- 
play of  manifold  causes  would  make  doubtful  the  isolation 
and  identification  of  an  influence  so  remote.  This  ten- 
dency to  elevate  a  single  cause  into  the  one  cause  control- 
ling economic  events,  when  these  causes  are  manifold, 
involves  a  false  sense  of  perspective  which  is  as  mislead- 
ing as  any  other  fundamental  error  in  economic  research. 

In  dealing,  therefore,  with  such  problems  as  the  in- 
fluence of  the  supply  of  the  precious  metals  upon  prices, 
the  influence  of  bimetallism  or  monometallism  upon  na- 
tional prosperity,  the  benefits  or  injuries  caused  by  paper 
inflation,  and  changes  in  economic  conditions  preceding 
or  following  changes  in  banking  laws — a  true  sense  of 
perspective  should  not  isolate  banking  phenomena  from 
many  other  phenomena  relating  to  changes  in  methods 
of  production  and  distribution,  in  routes  of  transporta- 
tion, in  the  movement  of  loanable  capital,  and  in  the 
efficiency  of  labor,  in  which  money  and  banking  methods 
indeed  play  an  important  part,  but  one  which  is  usually 
instrumental  rather  than  controlling. 

In  discussing  the  operation  of  monetary  principles, 
therefore,  there  cannot  be  the  same  certainty,  and  should 
not  be  the  same  dogmatism,  which  may  be  justified  in 
discussing  physical  laws.  The  so-called  laws  of  money 
can  be  determined  with  greater  precision  by  statistical 
inquiry,  and  by  observation  of  recorded  facts,  than  those 
of  some  other  branches  of  economic  science.  The  effects 
of  over-issues  of  paper,  the  movements  of  the  precious 


THE   PRINCIPLES   OP   MONEY   AND    BANKING 

metals  under  different  conditions,  the  expansion  and  con- 
traction of  credit,  as  illustrated  by  bank-note  issues,  de- 
posits, and  clearings,  can  be  traced  with  a  certain  degree 
of  accuracy,  from  the  very  fact  that  issues  of  money  and 
credit  are  usually  subject  to  government  supervision  and 
statistical  record.  The  statistics  in  civilized  countries, 
in  modern  times,  are  reasonably  accurate;  they  can  be 
collected  from  a  variety  of  sources,  and  comparisons  can 
be  made  of  the  operation  of  measures  substantially  the 
same  under  differing  conditions  which  approach  the  iso- 
lation of  phenomena  which  is  so  important  in  scientific 
experiments.  In  spite  of  this  advantage  in  the  considera- 
tion of  monetary  problems,  however,  there  are  many  dis- 
turbing influences  in  comparing  different  countries  in  the 
differences  in  general  conditions,  in  the  state  of  credit, 
and  in  the  operation  of  extraneous  causes,  which  prevent 
experiments  even  in  monetary  matters  from  being  con- 
ducted, like  those  of  physics,  in  a  vacuum. 

With  this  view  of  the  part  played  by  money  in  the 
economy  of  society,  the  study  of  its  principles  may  well 
begin.  There  is,  perhaps,  nothing  more  stimulating  and 
attractive  than  the  formulation  of  these  principles  from 
trustworthy  data,  and  if  care  is  taken  not  to  exaggerate 
the  importance  or  the  influence  of  any,  but  to  give  its 
proper  weight  to  each,  then  a  science  of  money  can  be 
built  up  by  the  careful  student  which  will  be  nearly  as 
exact  as  the  science  of  physics.  But  such  a  result  can- 
not be  attained  by  hasty  generalizations,  narrow  and 
distorted  views  of  isolated  phenomena,  the  abuse  of 
statistics  to  support  preconceived  prejudices,  or  exces- 
sive dogmatism  on  questions  whose  ultimate  solution 
must  depend  upon  the  progress  and  experience  of  society. 


II 

THE    FUNCTIONS  OF  MONEY 

How  money  grew  out  of  the  necessity  for  a  medium  of  exchange — 
Benefits  of  a  common  denominator  for  expressing  relations 
between  various  goods — Importance  of  a  standard  of  value — 
The  standard  and  the  medium  of  exchange  not  always  the 
same — How  money  and  banking  credits  afford  a  store  of  value 
for  postponed  consumption — How  they  thus  become  a  stand- 
ard of  deferred  payments. 

THE  essential  character  of  metallic  money  is  that  of 
a  merchandise  having  value  in  exchange.  It  de- 
rives this  value  in  exchange  in  some  degree  from  its  use 
as  money,  and  in  large  degree  also  because  it  is  prized  for 
other  uses.  Money  is  a  special  merchandise  which,  by 
its  natural  value  and  adaptability  as  a  medium  of  ex- 
change in  civilized  society,  serves  as  the  intermediary  for 
the  exchange  of  other  merchandise  and  services.1  "It  is 
a  true  merchandise,"  in  the  language  of  Laurent,  "if  one 
may  call  thus  a  product  capable  of  exchange  against 
another."  2  It  has,  however,  some  special  characteristics, 
which  are  thus  set  forth  by  Block:3 

"  If  money  is  a  merchandise,  it  has  a  special  character. 
It  is  received  in  preference  to  all  others;  its  value  at  a 
given  moment  is  the  same  everywhere  (at  least  for  moneys 

*A  similar  definition  is  that  of  Courcelle - Seneuil :  "A  mer- 
chandise of  known  quality,  of  value  varying  little  and  easy  of 
division,  for  which  are  exchanged  all  the  objects  offered  in  the 
market." — Traite  des  Operations  de  Banque,  p.  9. 

2  Theorie  des  Operations  Financicres,  p.  10. 

1  Les  Progres  de  la  Science  Economique,  II.,  p.  37, 
I.— a  I  "7 


THE   PRINCIPLES  OF  MONEY  AND  BANKING 

whose  nominal  corresponds  to  their  intrinsic  value) ;  it  is 
not  destined,  like  a  product  or  raw  material,  to  remain 
finally  with  a  consumer  to  be  destroyed  or  transformed, 
for  its  mission  is  to  pass  from  hand  to  hand  to  fulfil  its 
work  and  resume  its  course — to  circulate ;  it  is  a  means 
and  not  an  end." 

The  service  of  money  to  society  is  similar  in  character 
to  that  of  roads  and  other  means  of  communication. 
This  fact  was  noted  by  Adam  Smith,  in  laying  the  founda- 
tions of  modern  political  economy,  when  he  declared  that 
"the  gold  and  silver  money  which  circulates  in  any  country 
may  very  properly  be  compared  to  a  highway,  which,  while 
it  circulates  and  carries  to  market  all  the  grass  and  corn 
of  the  country,  produces  itself  not  a  single  pile  of  either." 
The  same  image  is  gracefully  presented  by  Tucker:1 

"  Its  useful  functions  can  be  compared  to  nothing  more 
aptly  than  to  those  of  a  canal  or  artificial  road,  by  which 
the  conveyance  of  articles  from  hand  to  hand  is  performed 
with  greater  ease,  despatch,  and  safety,  and  which  have 
always  been  found  to  give  a  great  spring  to  useful  indus- 
try and  commercial  enterprise,  not  only  by  improving 
existing  markets,  but  also  by  creating  new  ones." 

One  of  the  most  important  facts  to  be  kept  in  view  in 
the  study  of  monetary  problems  is  the  distinction  between 
money  and  capital.  Metallic  money  is  a  form  of  capital, 
but  capital  includes  many  other  things  than  money. 
Capital  includes  the  whole  aggregate  of  exchangeable 
things  capable  of  ministering  to  production  or  fulfilling 
the  desires  of  men.  Money  is  often  spoken  of  as  though 
it  were  the  sole  capital,  because  it  is  the  most  negotiable 
representative  of  capital.2  There  might,  however,  be,  in 
theory  at  least,  abundant  capital  without  money,  and 

1  The  Tlieory  of  Money  and  Banks  Investigated,  p.  17. 

2  "Before  the  economists,  the  word  capital  was  reserved  for  a 
sum  of  money  lent  at  interest.     It  was  not   the  only  form  of 
capital  or  the  oldest,  but  it  was  that  most  in  view." — Block,  I., 
p.  424- 

18 


THE    FUNCTIONS    OF    MONEY 

there  might  be  sufficient  supplies  of  money  with  deficient 
capital.  Each  of  these  conditions  is  illustrated  to  a  cer- 
tain extent  during  the  progress  of  an  economic  crisis. 
Money  becomes  scarce  and  its  rental  price  becomes  high 
when  commercial  activity  is  arrested  at  the  first  out- 
break of  a  crisis.  Capital  in  the  form  of  consumable 
goods  is  usually  abundant  at  such  times,  and  its  owners 
are  trying  in  vain  to  realize  upon  it  in  the  more  nego- 
tiable form  of  money.  The  situation  becomes  somewhat 
changed  after  the  intensity  of  the  crisis  is  over  and  the 
period  of  depression  sets  in  which  is  marked  by  the  ac- 
cumulation of  idle  capital  in  banks.  Even  this  accumu- 
lation, where  it  is  in  the  form  of  bank  credits,  represents 
command  over  capital  quite  as  much  as  command  over 
money,  but  there  is  usually  at  such  times  a  surfeit  of 
actual  currency  for  which  there  is  little  demand,  because 
of  the  distrust  and  prostration  which  have  followed  the 
arrest  of  active  commercial  operations. 

The  volume  of  money  in  the  world  may  be  substantially 
the  same  under  both  conditions,  but  it  is  subject  in  the 
first  instance  to  an  exaggerated  demand,  not  merely  for 
its  usual  function  as  a  medium  of  exchange,  but  as  a  store 
of  value,  while  at  a  later  stage  of  the  crisis  it  ceases  to  be 
required  so  much  as  usual  as  a  medium  of  exchange  and  is 
no  longer  hoarded  as  a  store  of  value  to  the  same  extent 
as  during  the  days  of  acute  panic.  The  money  of  a  nation 
is  only  a  small  part  of  its  capital.1  It  is  a  vitally  impor- 
tant part,  under  the  organization  of  modern  society,  be- 
cause it  performs  a  function  which  could  be  performed 
with  great  difficulty,  if  at  all,  without  it.  The  distinc- 
tion is  well  drawn  by  Fetter:  * 

'"One  does  not  take  note  that  when  capital  takes  the  form 
of  money,  it  retains  it  but  a  little  while,  and  that  more  often 
it  passes  from  hand  to  hand  until  consumed,  valued  in  money 
without  taking  the  form  of  it  at  all."— Courcelle-Seneuil,  Traite 
des  Operations  de  Banque,  p.  17. 

*  The  Principles  of  Economics,  p.  115. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

"Capital  must  not  be  identified  with  money,  although 
it  is  expressed  in  terms  of  money.  While  money  and  capi- 
tal are  not  identical,  neither  are  they  opposite  or  mutually 
contradictory.  Money  is  but  one  species  of  the  genus 
capital.  It  is  a  particularly  durable  form  when  industry 
as  a  whole  is  considered,  a  particularly  fleeting  form  in 
the  individual's  possession,  and  a  particularly  important, 
though  not  necessarily  the  most  important,  form  in  its 
social  significance.  The  things  composing  capital  are 
concrete  things,  scarce  forms  of  wealth,  some  of  which 
are  yielding  gratification  at  the  present  moment,  or  are 
destined  to  do  so  at  some  future  moment;  others  of  which 
are  not  themselves  giving  direct  gratification,  but  are  in- 
direct agents  for  the  gratifying  of  wants.  To  this  latter 
group  belongs  money." 

The  statement  of  the  difficulties  of  barter  and  the 
search  for  the  means  of  curing  them  naturally  leads  to 
the  definition  of  the  functions  of  money.  First  in  logical 
order  may  be  named  the  requirement  that  there  should 
be  a  common  medium  which  any  person  should  be  able 
to  exchange  against  any  desired  object,  because  the  me- 
dium was  generally  desirable  and  generally  exchange- 
able. Second  is  the  necessity  that  the  medium  should 
be  easily  divisible  and  capable  of  expression  in  units, 
that  it  might  be  made  a  common  denominator  of  all 
exchanges.  Third  is  the  necessity  that  the  medium 
should  have  general,  stable,  and  permanent  exchange 
value,  in  order  that  it  might  constitute  a  safe  standard 
for  the  common  denominator  and  might  be  so  acceptable 
that  it  would  not  be  parted  with  except  at  the  value  for 
which  it  was  obtained.  Out  of  these  requirements,  re- 
fined by  the  necessities  of  commerce,  have  grown  the  five 
essential  functions  of  money  as  they  are  recognized  to- 
day: 

(1)  A  medium  of  exchange. 

(2)  A  common  denominator. 

(3)  A  standard  of  value. 

20 


THE    FUNCTIONS    OF    MONEY 

(4)  A  store  of  value. 

(5)  A  standard  of  deferred  payments. 

It  has  sometimes  been  contended  that  there  are  not 
five  distinct  functions  of  money,  but  that  the  function  of 
a  standard  of  value  is  linked  with  that  of  a  common  de- 
nominator, and  that  the  function  of  a  store  of  value  is  not 
applicable  to  money,  but  only  to  the  precious  metals 
when  withdrawn  from  monetary  uses.  It  is  convenient, 
however,  to  discuss  each  function  separately,  in  order  to 
discover  if  real  distinctions  exist  and  to  make  as  clear  as 
possible  even  those  functions  which  blend  with  each  other. 

I.  The  first  important  use  of  money  in  nearly  every 
society  is  as  a  medium  of  exchange.     The  necessity  for 
such  a  medium  is  pointed  out  by  Nicholson  in  these 
words: l 

"Without  a  complete  revolution  in  the  conditions  of 
society,  a  medium  of  exchange  is  indispensable.  Pro- 
duction rests  on  division  of  labor,  and  division  of  labor 
involves  easy  and  prompt  exchange,  which,  again,  involves 
a  common  medium.  Money  in  this  sense  is  as  essential 
to  the  interchange  of  commodities  as  language  to  the 
interchange  of  ideas,  and  in  the  last  resort  the  inter- 
change of  commodities  is  for  the  most  part  the  exchange  of 
the  services  through  which  they  are  made.  Thus  money, 
in  the  sense  of  a  common  medium  of  exchange,  is  neces- 
sary in  order  to  exchange  all  kinds  of  labor,  from  the 
highest  to  the  lowest." 

II.  A  common   denominator  affords  the  opportunity 
for  referring  each  transaction  to  a  common  unit  and  com- 
paring the  value  of  articles,  one  with  another.2     If  there 

1  A  Treatise  on  Money  and  Essays  on  Monetary  Problems,  p.  16. 
The  comparison  of  money  with  letters  is  made  also  by  Gibbon 
and  Chevalier. — Vide  Walker,  Money,  p.  14. 

2  "There  is  need  of  such  a  measure,  and  it  is  analogous  to  the 
want  experienced  by  the  mathematician  who  has  a  column  of 
fractions  to  sum  up,  and  who  does  it  by  first  reducing  them  all 
to  a  common  denominator." — Roscher,  I.,  p.  341. 

91 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

were  no  common  denominator,  it  would  be  necessary  to 
calculate  the  value  of  every  exchangeable  article  in  the 
value  of  every  other  article.  If  two  chickens  were  worth 
a  hat,  and  three  pair  of  shoes  were  worth  a  coat,  these 
equations  would  afford  no  means  of  comparison  between 
the  value  of  chickens  and  coats.  Such  a  basis  of  com- 
parison might  be  found  by  adopting  the  chickens  or  the 
hat  as  the  fixed  point  of  departure.  This  would  make  the 
article  chosen  a  common  denominator  and  the  problem 
would  be  solved.  The  most  extensive  properties,  even 
to  railways  and  steamboats,  could  be  measured  in  chick- 
ens, as  they  are  now  measured  in  dollars,  francs,  or  pounds 
sterling.  But  in  the  absence  of  a  common  unit,  a  tabular 
list  of  values  for  twelve  articles  exchangeable  against 
each  other  would  involve  sixty-six  different  comparison^. 
The  first  article  taken  would  have  to  be  measured  against 
each  of  the  other  eleven,  the  second  would  have  to  be 
measured  against  eleven  others,  and  so  on  throughout 
.the  list.  It  would  be  impossible  for  any  person  to  carry 
these  relations  constantly  in  his  mind,  with  the  great 
multiplicity  of  articles  now  the  subject  of  commerce,  and 
fluctuations  in  value,  even  in  two  or  three  articles,  would 
practically  destroy  the  value  of  a  tabular  statement.  In 
the  language  of  Mill,  regarding  the  tailor,  "The  calcula- 
tions must  be  recommenced  on  different  data,  every  time 
he  bartered  his  coats  for  a  different  kind  of  article ;  and 
there  could  be  no  current  price,  or  regular  quotations  of 
value."  *  With  the  adoption  of  a  common  denominator 
in  the  form  of  money,  the  economic  man  realizes  the  ad- 
vantages set  forth  by  Bourguin : 2 

1  Principles  of  Political  Economy  (bk.  iii.,  chap,  vii.,  §  i),  II., 
p.  17. 

1  La  Mesure  de  la  Valeur  et  la  Monnaie,  p.  43.  Marx  declares, 
"While  all  commodities  express  their  exchange  values  in  gold, 
gold  expresses  its  exchange  value  directly  in  all  commodities. 
While  commodities  assume  the  form  of  exchange  value  in  rela- 
tion to  each  other,  they  lend  to  gold  the  form  of  the  universal 


THE    FUNCTIONS    OF    MONEY 

"  If  I  learn  that  the  hectolitre  of  grain  is  worth  twenty 
francs,  immediately  and  by  an  unconscious  operation  of 
the  mind,  I  measure  the  aggregate  values  of  the  grain  by 
representing  to  myself  everything  which  might  be  bought 
for  twenty  francs.  By  a  blind  and  instantaneous  in- 
tuition which  the  habit  of  the  immemorial  use  of  money 
has  given,  I  grasp  en  bloc,  as  if  forming  an  indivisible 
mass,  the  aggregate  value  of  a  twenty-franc  piece  over 
against  the  world  of  commodities  and  thus  appreciate 
through  the  medium  of  money,  without  taking  definite 
account  of  it,  the  entire  series  of  relations  of  value  be- 
tween the  hectolitre  of  grain  and  other  merchandise." 

III.  The  function  of  money  as  a  standard  of  value  is 
related  to  its  function  as  a  common  denominator.  It  is 
the  standard  which  gives  form  and  fixity  to  the  common 
denominator.  The  conception  of  a  standard  of  value  for 
the  expression  of  price  is  more  complex  than  the  con- 
ception of  such  measures  as  those  for  weight  or  heat,  be- 
cause value  and  price  are  not  inherent  qualities,  but  are 
relationships  between  commodities  which  grow  out  of 
human  wants  and  satisfactions.  An  article  does  not 
have  value  according  to  the  amount  of  weight  or  heat  it 
possesses,  but  according  to  the  conception  of  its  utility 
present  in  the  human  mind.  A  standard  of  value,  there- 
fore, is  not  a  measure  of  value,  but  only  a  convenient 
scale  by  which  values  are  expressed  after  their  measure- 
ment has  been  made  in  terms  of  human  desire  or  satis- 
faction. As  Bourguin  expresses  it:  * 

"The  true  reason  why  it  is  not  proper  to  speak  of  the 
measure  of  value  is  that  value  is  not  a  property,  a  magni- 

equivalent,  or  of  money." — Contribution  to  the  Critique  of  Polit- 
ical Economy,  p.  75. 

1  La  Mesure  de  la  Valeur  et  la  Monnaie,  p.  38.  The  French 
monetary  law  of  1793  preserves  this  distinction,  always  referring 
to  the  "monetary  unit"  and  never  to  "the  standard."  M. 
Wolowski  proposed  the  use  of  the  term  evaluateur  instead  of 
italon  (standard),  and  M.  Block  proposes  unite  de  valeur  (unit 
of  value). — Les  Pr ogres  de  la  Science  Economique,  II.,  p.  37. 

23 


THE  PRINCIPLES   OF  MONEY  AND  BANKING 

tude.  The  franc  is  not  the  unit  of  the  measure  of  value, 
but  only  the  unit  of  the  measure  of  money,  of  the  quan- 
tity of  silver  figuring  in  exchanges.  It  is  a  certain  physi- 
cal quantity  of  coined  silver,  a  piece  of  five  grammes, 
which  has  been  adopted  as  a  unit  for  measuring  the  quan- 
tity of  silver  constituting  the  value  of  each  article  in 
relation  to  silver." 

The  adoption  of  a  standard  as  nearly  fixed  as  may  be 
is  of  cardinal  importance  in  the  creation  of  a  proper 
monetary  system,  but,  the  standard  having  been  chosen, 
it  does  not  follow  that  the  material  of  which  it  is  com- 
posed needs  to  be  employed  in  all  transactions  based  upon 
the  standard.  It  is  not  a  merely  theoretical  proposition 
that  the  standard  and  the  medium  of  exchange  are  not 
always  the  same.  It  has  happened  repeatedly  in  mone- 
tary history.  The  famous  Bank  of  Amsterdam  and  the 
Bank  of  Hamburg,  in  the  seventeenth  century,  created 
a  standard  and  common  denominator  in  the  form  of 
"bank  money,"  based  upon  a  fixed  weight  of  silver,  al- 
though no  coins  of  this  weight  were  created.  Silver  and 
other  metals  were  received  at  the  bank  by  weight  and 
intrinsic  value  and  converted  into  bank  money  upon  the 
books  of  the  bank.  Upon  these  books,  and  by  means  of 
certificates  of  title  to  bank  money,  were  recorded  the 
transfers  of  wealth  in  the  community. 

When  this  was  exclusively  the  case,  the  bank  money 
constituted  in  a  sense  a  medium  of  exchange,  a  common 
denominator,  and  a  standard  of  value;  but  in  retail  trans- 
actions there  circulated  much  silver  and  gold  which  was 
a  medium  of  exchange,  but  which  was  a  common  denomi- 
nator only  in  a  restricted  sense  and  was  hardly  a  stand- 
ard of  value  at  all.  It  was  only  when  the  medium  was 
converted  into  bank  money  that  the  terms  in  which  it 
was  expressed  became  the  common  denominator,  and  the 
weight  of  silver  which  the  bank  money  represented  be- 
came a  standard  of  value.  Thus  money  transactions 
were  consummated  without  the  transfer  of  coin,  and  the 

24 


advantages  of  the  system  made  it  one  of  the  germs  of  the 
great  use  of  credit  instruments  in  modern  times.  Money 
which  is  thus  employed  simply  as  a  standard  without  being 
actually  in  use  is  designated  as  "money  of  account,"  and 
Marx  correctly  declares:  * 

"Money  as  money  of  account  may  exist  exclusively  in 
idea,  while  the  money  in  actual  existence  may  be  coined 
according  to  an  entirely  different  standard.  Thus  the 
money  in  circulation  in  many  English  colonies  of  North 
America  consisted  until  late  in  the  eighteenth  century  of 
Spanish  and  Portuguese  coins,  although  the  money  of 
account  was  throughout  the  same  as  in  England." 

The  use  of  money  as  a  standard  of  value  has  become 
of  constantly  increasing  importance  in  modern  industrial 
societies.  The  fact  that  money  is  a  common  denominator 
has  led  to  the  expression  of  nearly  all  contracts  in  terms 
of  money.*  This  makes  it  of  the  highest  importance  that 
the  standard  shall  be  invariable  in  value.  In  so  far  as 
this  is  not  the  case,  injustice  is  likely  to  be  done  between 
contractors,  whether  the  purchasing  power  of  money 
rises  or  falls.  If  its  purchasing  power  rises,  indepen- 
dently of  the  increased  productive  power  of  labor,  the 
person  having  money  to  pay  is  compelled  to  pay  a 
larger  purchasing  power  than  he  would  have  paid  if 
the  value  of  money  had  remained  constant.  If  the  pur- 
chasing power  of  money  falls,  the  person  receiving  it 
finds  that  he  has  received  less  purchasing  power  than 
the  amount  which  he  expected  when  the  contract  was 
made. 

A  reasonable  degree  of  stability  in  the  standard  is  what 
makes  it  useful  for  measuring  values  at  different  times  and 
places.  We  wish,  says  Gide,  "to  compare  the  values  of 
merchandise  situated  in  different  places  or  to  compare 

1  Contribution  to  the  Critique  of  Political  Economy,  p.  88. 

1  "Money  is  best  defined  as  a  thing  which,  by  common  consent 
of  the  business  community,  is  used  as  a  basis  of  commercial  obli- 
gations."— Hadley,  Economics,  p.  180. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

the  value  of  the  same  merchandise  at  different  dates."1 
The  importance  of  this  certainty  in  the  standard  was 
recognized  by  Copernicus  nearly  four  centuries  ago,  when 
he  declared  in  his  famous  memorial  to  the  King  of  Poland : 2 

"Money  is  then  in  some  sort  a  common  measure  for 
calculating  values,  but  this  measure  ought  always  to  be 
fixed  and  to  conform  to  an  established  rule.  Otherwise, 
there  will  be,  of  necessity,  disorder  in  the  State.  Buyers 
and  sellers  will  be  constantly  deceived,  as  they  would  be 
if  the  ell,  the  bushel,  or  the  weight  should  not  preserve  a 
fixed  proportion." 

In  a  country  having  a  fixed  standard  the  assurance 
exists  that  contracts  expressed  in  terms  of  money  will  be 
discharged  in  a  known  quantity  of  metal  of  a  compara- 
tively stable  value.  This  gives  certainty  to  business 
transactions  and  permits  large  enterprises  to  be  carried 
on  upon  a  small  margin  of  profit.  Efforts  have  been  made 
in  several  states  to  preserve  the  value  of  money  by  chang- 
ing the  weight  of  metal  in  the  coins  without  changing 
their  denominations.  Such  a  process  may  affect  con- 
tracts expressed  in  terms  of  money  to  the  disadvantage  of 
the  creditor,  but  the  effect  upon  current  exchanges  is  soon 
offset  by  changes  in  prices.  Prices  rise  in  the  proportion 
that  the  metallic  money  has  been  deteriorated,  and  it  re- 
quires the  same  weight  of  metal  as  before  to  obtain  a 
given  article.  Such  changes  in  the  weight  or  fineness  of 
coins  were  common  during  the  Middle  Ages  as  a  means 
of  increasing  the  revenue  and  diminishing  the  debt  of 
governments. 

IV.  Money  is  a  store  of  value,  because  it  enables  value 
to  be  embodied  in  a  compact  commodity,  generally  ac- 
ceptable, and  capable  of  being  kept  for  an  indefinite 
period  without  loss.  The  proposition  that  money  is  a 
store  of  value  is  disputed  by  Walker  and  some  other 
writers  upon  the  ground  that  the  metal  ceases  to  be 

1  Principes  d'Economte  Polttique,  p.  90. 
1  Monete  Cudende  Ratio,  p.  49. 
26 


THE    FUNCTIONS    OF    MONEY 

money  when  it  is  converted  into  hoards.1  This  might  be 
true  in  a  limited  sense,  where  coin  was  melted  up  into 
jewels  for  the  purpose  of  a  permanent  hoard  against  old 
age  or  emergencies.  Money  is,  however,  a  store  of  value 
of  the  highest  character  under  modern  commercial  con- 
ditions. It  is  the  one  store  of  value  which  never  loses 
exchangeability  against  other  commodities.  In  the  lan- 
guage of  Bagehot,  "  Money  is  never  '  second  hand  ' ;  it  will 
always  fetch  itself,  and  it  loses  nothing  by  keeping."  2 
This  is  the  reason  for  the  great  hoards  of  gold  and  silver 
formerly  accumulated  by  powerful  states  for  war  neces- 
sities— illustrated  in  modern  times  by  the  hoard  of  120,- 
000,000  marks  ($30,000,000)  which  is  kept  by  the  Im- 
perial German  Government  in  the  Fortress  of  Spandau. 
Money  is  not  only  a  store  of  value  of  the  highest  char- 
acter, but  it  was  almost  the  only  store  of  value  of  an  ex- 
changeable character  until  the  creation  of  negotiable 
securities.  There  can  be  only  three  general  classes  of 
property  having  intrinsic  value:  (i)  Consumable  com- 
modities (including  raw  materials) ;  (2)  fixed  capital 
(invested,  for  instance,  in  factories,  railways,  and  land) ; 
and  (3)  money.  Consumable  commodities  cannot  be 
hoarded  without  loss.  Fixed  capital  may  become  use- 
less if  the  demand  for  its  products  ceases  or  may  de- 
teriorate in  value  for  a  variety  of  reasons.  Such  capital 
may  be  represented  by  negotiable  securities,  which  es- 
cape the  inconvenience  of  not  being  capable  of  ready  ex- 
change, but  they  are  liable  to  deterioration  from  the 
same  causes  as  the  fixed  capital  itself  and  for  other  causes 
inherent  in  the  operations  of  the  stock  market.  This 

1  Money,  p.  12.  Block,  who  takes  the  contrary  view,  cites  the 
case  of  a  farmer  who  converts  100  hectolitres  of  grain  into  2000 
francs,  and  declares:  "The  2000  francs  in  the  bureau  do  not 
cease  to  be  money  or  available  capital;  they  are  capable  of  being 
put  in  circulation  at  any  moment.  Does  a  horse  cease  to  be  a 
horse  while  he  is  permitted  to  rest  in  the  stable?" — Les  Pr  ogres 
de  la  Science  Economique,  II.,  p.  41. 

3  The  Transfer  ability  of  Capital,  Works,  V.,  p.  285. 

27 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

leaves  money  as  the  only  store  of  value  which  is  not  in 
danger  of  physical  deterioration  and  is  always  readily 
exchangeable.  While  its  exchange  value  may  alter  un- 
der varying  conditions,  it  possesses  much  of  the  peculiar 
quality,  ascribed  to  it  even  in  early  times  by  St.  Thomas, 
of  a  guarantee  or  security  for  the  possession  of  other 
goods,  after  the  manner  set  forth  by  Liberatore:  * 

"For  in  truth  money  guarantees  to  us  that  we  may 
provide  for  our  needs  whenever  we  wish  by  offering  it  in 
exchange  for  some  other  merchandise,  the  object  of  our 
desires." 

The  quality  of  money  as  a  store  of  value  has  attained 
a  new  development  in  modern  times  by  the  use  of  bank- 
ing credits.  Banking  credits  constitute  titles  to  metallic 
money.  Both  metallic  money  and  banking  credits  are 
instruments  for  transferring  wealth.  They  represent 
titles  vested  in  the  holders  of  credits  to  command  the 
products  and  services  of  the  community.  But  banking 
credits  owe  their  value  to  their  negotiable  character. 
They  are  exchanged  against  commodities  when  com- 
modities are  desired,  but  they  are  capable  of  exchange 
against  metallic  money  when  money  becomes  more  de- 
sirable than  commodities. 

The  use  of  money  as  a  store  of  value  is  important,  even 
under  ordinary  economic  conditions,  in  effecting  trans- 
fers from  place  to  place.  The  power  to  transmit  money 
obviates  the  necessity  of  transmitting  commodities  where 
there  is  not  an  even  interchange  of  commodities  between 
two  communities.  Money  then  takes  the  place  of  other 
articles,  as  the  most  compact,  invariable,  and  generally 
acceptable  method  of  making  payments.  This  is  pointed 
out  by  Jevons  in  the  following  words: 8 

"At  times  a  person  needs  to  condense  his  property  into 
the  smallest  compass,  so  that  he  may  hoard  it  away  for  a 
time,  or  carry  it  with  him  on  a  long  journey,  or  transmit 

1  Principe s  d'Economie  Politique,  p.  136. 

1  Money  and  the  Mechanism  of  Exchange,  p.  15. 


THE    FUNCTIONS    OF    MONEY 

it  to  a  friend  in  a  distant  country.  Something  which  is 
very  valuable,  although  of  little  bulk  and  weight,  and 
which  will  be  recognized  as  very  valuable  in  every  part 
of  the  world,  is  necessary  for  this  purpose.  The  current 
money  of  a  country  is  perhaps  more  likely  to  fulfil  these 
conditions  than  anything  else,  although  diamonds  and 
other  precious  stones,  and  articles  of  exceptional  beauty 
and  rarity,  might  occasionally  be  employed." 

V.  The  use  of  money  as  a  standard  of  deferred  pay- 
ments is  one  of  the  results  of  the  development  of  credit 
in  civilized  societies.  Contracts  for  the  payment  of 
money  at  a  future  time  are  of  ancient  origin,  but  have 
attained  a  wide  development  with  the  modern  extension 
of  trade.  The  reasons  already  stated  why  there  should 
not  be  a  change  in  the  standard  of  value  apply  with  add- 
ed force  in  reference  to  contracts  for  deferred  payments. 
Such  contracts,  made  in  the  present  with  a  view  to  the 
future,  should  be  capable  of  certainty  in  a  civilized  state 
in  order  to  make  possible  large  enterprises  looking  to  the 
distant  future  for  their  completion.  As  Nicholson  says:  * 

"Speaking  generally,  every  one  is  bound  by  a  series  of 
contracts  or  quasi-contracts  to  give  and  to  receive  cer- 
tain sums  of  money  at  various  future  dates,  and  his  whole 
industrial  life  depends  on  the  fulfilment  of  these  contracts 
and  quasi-contracts.  The  working  man  expects  during 
a  certain  time  to  receive  so  much  money  and  therewith 
to  provide  himself  and  his  family  with  goods.  On  the 
expectation  of  this  demand  other  people  provide  the 
goods,  and  others  the  means  to  make  the  goods,  and  others 
the  means  to  make  the  means,  and  so  on  indefinitely." 

These  operations  are  correctly  described  as  "instances 
of  deferred  payments,"  and  are  seriously  affected  by 
changes  in  the  standard.  It  is  possible  in  such  cases  for 
traders  to  protect  themselves  in  some  measure  against 
anticipated  changes,  where  they  are  not  too  rapid  and 

1  Principles  of  Political  Economy,  II.,  p.  94. 
29 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

too  arbitrary,  by  changing  their  prices.  It  is  less  easy 
for  the  wage-earner  to  secure  an  advance  in  the  custom- 
ary payment  for  services,  where  the  value  and  purchas- 
ing power  of  money  have  been  reduced.  In  both  cases, 
however,  there  is  less  disposition  to  make  contracts  look- 
ing to  the  distant  future,  and  thus  the  great  enterprises 
which  give  life  to  modern  industry  are  hampered. 

The  most  common  illustration  of  the  violation  of  the 
rule  of  stability  of  value  and  depreciation  of  the  stand- 
ard is  the  cases  where  contracts  are  expressed  in  the 
lawful  money  of  a  country,  based  upon  a  metallic  .stand- 
ard, which  is  subsequently  changed  for  a  paper  stand- 
ard. Such  contracts,  where  not  payable  in  specific  terms 
in  metallic  money,  are  often  held  to  be  payable  in  the  de- 
preciated paper  currency  which  has  become  the  usual 
medium  of  exchange.  This  fact  has  sometimes  led  to  the 
belief  that  the  value  of  paper  money  could  be  maintained 
at  parity  with  the  metallic  standard  by  making  it  a  legal 
tender  for  past  debts.  This  belief  is  based  upon  the 
theory  that  there  will  always  be  a  demand  for  the  legal- 
tender  money  for  the  discharge  of  past  debts  and  that 
this  demand  will  maintain  its  value.  The  investigations 
of  Mr.  Charles  S.  Fairchild,  ex-Secretary  of  the  Treasury, 
show  that  the  use  of  money  in  deferred  payments  for  long 
terms  has  not,  even  under  modern  conditions,  attained  a 
volume  which  would  sustain  this  theory.  Mr.  Fairchild 
says:  * 

"If  the  census  of  1890,  where  it  is  attempted  to  show 
the  past  debts  of  the  country  of  one  kind  and  another,  be 
compared  with  the  clearing-house  transactions  of  any 
year,  you  will  see  that  not  more  than  four  per  cent,  of  the 
transactions  of  any  single  year  can  consist  of  the  liquida- 
tion of  debts  that  antedated  that  year ;  and  that  is  a  com- 
parison simply  with  the  clearing-house  transactions,  and 

1  Hearings  and  Arguments  before  the  Committee  on  Banking 
and  Currency  of  the  House  of  Representatives,  Fifty-fifth  Con- 
gress, Second  Session,  p.  91. 

30 


THE    FUNCTIONS    OF    MONEY 

we  know  that  there  is  a  vast  body  of  transactions  that  do 
not  appear  in  the'  clearing-house  transactions  at  all. 
Therefore  the  liquidation  of  past  debts  is  statistically 
shown  to  be  relatively  very  small  as  compared  with  cur- 
rent transactions,  and  the  final  consideration  is  that  it 
must  be  so,  because  out  of  what  fund  are  you  going  to 
accumulate  the  money  with  which  to  discharge  past 
debts  ?  It  must  be  that  the  only  place  from  which  it  can 
be  gotten  is  from  the  profits  of  current  transactions. 
Therefore  the  current  transactions  must  bear  an  enor- 
mously greater  proportion  to  past  debts." 


Ill 

THE  ORIGINS  OF  MONEY 

Not  so  sudden  a  discovery  as  sometimes  assumed — An  evolution 
from  the  segregation  of  private  property — Money  cannot  exist 
without  a  surplus  of  capital  beyond  im'mediate  needs  for  con- 
sumption— Hence  the  money  quality  came  to  be  imposed  upon 
articles  of  ornament  rather  than  necessity — How  gold  and 
silver  became  symbols  of  wealth  and  power — The  gradual 
emergence  of  these  metals  as  the  most  exchangeable  of  com- 
modities. 

THE  history  of  the  development  of  money  is  much 
less  simple  and  more  interesting  than  the  account 
given  in  early  economic  text  -  books.  That  money  of 
stamped  metal  sprang  into  being  in  ite,  present  perfected 
form  as  soon  as  society  began  to  feel  the  inconvenience  of 
direct  barter  is  a  rough  -  and  -  ready  conception  which 
would  not  be  seriously  defended  by  any  careful  student, 
but  which  is  almost  implied  in  many  early  discussions  of 
the  subject.  This  theory,  in  its  crudest  form,  implies 
that  exchanges  were  first  carried  on  by  barter  of  one  ar- 
ticle for  another,  until  it  was  discovered  that  the  inter- 
vention of  a  third  commodity,  capable  of  subdivision  and 
generally  acceptable,  would  facilitate  the  division  of  the 
articles  exchanged  into  the  desired  proportions  and  make 
exchanges  easy,  and  that  this  commodity  was  by  univer- 
sal convention  adopted  as  money.  It  requires  but  little 
reflection,  however,  to  make  it  clear  that  this  account  of 
the  development  of  money  is  incomplete.  It  sums  up  in 
a  way  the  ultimate  results  of  this  evolution,  but  it  passes 
over  intermediate  steps,  extending  over  many  centuries, 

32 


THE    ORIGINS    OF    MONEY 

and  it  takes  much  for  granted  in  the  progress  of  economic 
history.  The  use  of  metals  as  money  rests  upon  a  firmer 
basis  than  convention,  in  the  unconscious  operation 
among  all  civilized  peoples  of  the  principle  of  natural 
selection.  Money  of  coined  metal  is  an  evolution,  not  a 
sudden  creation. 

The  simplest  form  of  existence  supposes  that  each  in- 
dividual shall  produce  all  that  is  necessary  to  sustain  life 
—that  he  shall  kill  and  dress  his  own  animal  food,  gather 
his  vegetable  food,  and  prepare  his  own  clothing  and 
shelter,  so  far  as  his  degree  of  civilization  suggests  the 
necessity  for  these  things.  When  human  economy  ad- 
vanced another  step,  exchange  came  into  being.  In 
theory,  at  least,  exchanges  were  first  conducted  by  means 
of  barter.  The  man  who  had  an  excess  of  game  and  a 
deficiency  of  skins  exchanged  a  part  of  his  game  with  the 
man  who  had  an  excess  of  skins  and  a  deficiency  of  food. 
But  three  difficulties  were  discovered  in  this  method  of 
dealing.  The  man  who  had  a  brace  of  birds  and  wanted 
a  goat-skin  might  find  a  man  with  the  skin,  but  who 
wanted  no  birds ;  or  he  might  find  that  the  man  with  the 
skin  wanted  birds,  but  not  enough  of  them  to  pay  for  the 
skin ; l  or  he  might  find  that  the  man  with  the  skin  had 
been  in  the  habit  of  exchanging  skins  for  deer  or  fish  and 
did  not  know  how  to  calculate  its  value  in  birds.  Then 
followed  the  process  described  by  Aristotle : 2 

"From  this  barter  arose  the  use  of  money,  as  might  be 
expected;  for  as  the  needful  means  for  importing  what 
was  wanted,  or  for  exporting  a  surplus,  was  often  at  a 
great  distance,  the  use  of  money  was  of  necessity  devised. 
For  it  is  not  everything  which  is  naturally  useful,  that  is 
easy  of  carriage ;  and  for  this  reason  men  invented  among 

1  These  difficulties  are  called  by  Jevons,  "  want  of  coincidence 
in  barter  ";  and  he  declares  that  "  to  allow  an  act  of  barter,  there 
must  be  a  double  coincidence,  which  will  rarely  happen." — 
Money  and  the  Mechanism  of  Exchange,  p.  4. 

1  The  Politics  and  Economics  of  Aristotle,  p.  21. 

'•-3  33 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

themselves,  by  way  of  exchange,  something  which  they 
should  mutually  give  and  take,  and  which  being  really 
valuable  in  itself,  might  easily  be  passed  from  hand  to 
hand  for  the  purposes  of  daily  life,  as  iron  and  silver,  or 
anything  else  of  the  same  nature.  This  at  first  had  a 
fixed  standard  simply  according  to  its  weight  or  size ;  but 
in  process  of  time  they  put  upon  it  a  certain  stamp,  to 
save  the  trouble  of  weighing,  and  this  stamp  was  affixed 
as  a  sign  of  its  express  value." 

While  in  these  words  of  the  old  Greek  philosopher  are 
summed  up  the  fundamental  reasons  for  the  use  of  money, 
they  confuse  into  a  definite  and  conscious  series  of  meas- 
ures what  was  in  fact  not  an  invention  but  a  long  process 
of  unconscious  evolution.  The  course  of  this  evolution  is 
better  stated  by  McCleary : l 

"By-and-by  men  observed  that  there  was  some  article 
that  was  in  such  general  demand  that  in  exchange  for  it 
one  could,  at  any  time,  get  any  other  thing  that  he  might 
desire.  This  object  of  general  desire  gradually  became 
the  medium  through  which  exchanges  were  effected.  A 
person  having  a  surplus  of  anything,  even  if  he  had  no 
unsupplied  want,  would  take  this  medium  of  exchange, 
knowing  that  for  it  he  could  at  any  time  supply  his  wants." 

The  acceptance  of  the  simple  theory  of  the  sudden  adop- 
tion of  money  as  a  substitute  for  barter  departs  from  the 
actual  history  of  social  development  in  projecting  back 
into  primitive  times  the  system  of  private  property  rights 
and  organized  exchange  as  it  exists  in  modern  times. 
Money  was  not  required  where  domestic  economy  pre- 
vailed ;  it  was  not  at  first  employed  even  in  foreign  trade ; 
but  in  the  nature  of  the  case  it  came  into  most  general  use 
and  served  the  most  beneficial  purposes  in  cities,  where 
the  division  of  labor  permitted  the  organization  of  in- 
dustry, and  in  foreign  trade,  where  a  medium  of  exchange 
was  needed  of  intrinsic  value  and  general  acceptability. 

'Report  of  June  15,  1898,  on  "Strengthening  the  Public 
Credit";  House  Report  1575,  55th  Congress,  2d  Session,  p.  13. 

34 


THE    ORIGINS    OF    MONEY 

This  progression  in  the  use  of  money  made  great  strides 
in  the  eighteenth  and  nineteenth  centuries  with  the  grad- 
ual extension  of  the  division  of  labor  and  with  the  capi- 
talistic organization  of  industry,  and  is  still  going  on  in 
the  twentieth  century.  Every  new  community  opened 
to  civilization,  like  Africa,  China,  and  the  Philippines, 
creates  a  new  field  for  organized  exchange,  and  illustrates 
under  the  eyes  of  those  now  living  the  process  of  evolution 
of  the  use  of  money  since  the  beginnings  of  civilized  so- 
ciety. 

The  slow  evolution  of  metallic  money  followed  certain 
well-defined  lines.  It  did  not  involve  the  sudden  sub- 
stitution of  a  recognized  intermediary  between  commodi- 
ties which  had  formerly  been  exchanged  by  barter.  It 
involved  rather  the  gradual  evolution  through  barter  of 
the  intermediary  which  was  found  most  generally  ac- 
ceptable. The  means  of  exchange  was  long  confounded 
and  intermingled  with  the  final  objects  of  exchange.  The 
man  who  exchanged  grain  for  cattle  in  the  heroic  days  of 
Greece  might  take  the  cattle  because  he  wished  to  con- 
sume them  as  food  or  increase  his  herd,  or  he  might  take 
them  with  the  sole  object  of  exchanging  them  with  some 
one  else  for  a  sword  or  a  shield.  In  the  former  case  they 
were  not  money  in  the  usual  acceptance  of  the  term;  in 
the  latter  case  they  were  money.  It  was  the  same  with 
kettles,  long  an  object  of  exchange  and  measure  of  value 
in  primitive  Greek  society.  They  might  be  taken  for 
use  or  for  the  purpose  of  exchanging  them  again.  When 
society  began  dimly  to  grasp  the  conception  of  a  third 
and  constant  commodity  interposed  between  the  two 
halves  of  an  exchange,  it  was  the  articles  which  had  been 
found  most  exchangeable  in  barter  which  pointed  to  the 
selection  of  the  wonderful  substance  which  was  to  have 
the  new  and  unique  quality  of  commanding  all  other 
things.  It  was  a  natural  result  of  this  evolution  that 
the  ox,  the  slave,  and  the  utensil  of  daily  life  gave  their 
name  to  the  coins,  and  that  the  earliest  bronze  money 

35 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

of  Italy  contained  precisely  the  same  alloy  of  copper,  tin, 
and  zinc  as  the  utensils  which  had  preceded  it  as  a  medium 
of  exchange.1 

In  this  progress  from  direct  barter  to  the  use  of  a  chosen 
intermediary  of  exchanges,  several  principles  stand  out, 
working  often  unconsciously,  but  none  the  less  surely,  be- 
cause they  were  the  inevitable  consequence  of  simple 
economic  laws  and  of  the  almost  universal  bent  of  the 
human  mind.  Money  was  no  odd  invention,  to  be  played 
with  and  set  aside  as  a  curious  illustration  of  the  in- 
genuity of  an  individual.  It  did  not  come  into  use  until 
there  was  need  for  it,  and  there  was  not  need  for  it  be- 
fore society  had  an  economic  organization  which  per- 
mitted division  of  labor  and  the  creation  of  surplus  prod- 
ucts for  exchange. 

A  surplus  of  capital  above  the  needs  of  current  pro- 
duction is  a  prerequisite  for  any  community  which  de- 
sires to  use  money.  For  a  primitive  people  the  usual 
tools  of  agricultural  production,  seed  and  live  stock,  are 
more  essential  than  money.  It  is  only  when  by  these 
means  surplus  capital  has  been  created  that  it  can  be  in- 
vested in  a  commodity  to  be  employed  solely  as  a  tool 
of  exchange,  just  as  it  is  only  when  the  farmer  has  saved 
something  beyond  his  necessary  tools  and  seed  that  he 
can  afford  to  invest  in  a  well-made  wagon  for  carrying 
his  products  to  market.  This  principle  explains  in  part 
why  in  many  early  communities  the  article  used  as 
money  was  also  useful  for  many  other  purposes.  Where 
cattle,  for  instance,  served  as  money  they  represented  in 
themselves  a  productive  form  of  wealth.  Their  use  as  a 
medium  of  exchange  did  not  involve  the  setting  aside  of 
a  large  amount  of  capital  above  that  required  for  other 
uses.  When  surplus  wealth  accumulated  in  the  hands  of 
primitive  peoples,  it  was  employed  chiefly  in  the  acquisi- 
tion of  articles  which  served  for  ornament.  These  arti- 

1  Carlile,  The  Evolution  of  Modern  Money,  p.  236. 
36 


THE    ORIGINS    OP    MONEY 

cles,  however,  being — in  their  highest  form  of  gold  and 
silver — articles  which  were  generally  prized  for  the  same 
purposes  among  other  peoples,  it  came  about  that  they 
possessed  the  quality  of  exchangeability  peculiarly  be- 
longing to  money.  Thus  they  served  the  double  purpose 
of  ornamentation  and  a  store  of  value,  being  capable  of 
conversion  from  an  ornament  into  a  medium  of  exchange 
when  the  need  for  it  arose.  The  use  in  this  way  of  the 
precious  metals  required  the  setting  aside  of  saved  capital 
beyond  the  implements  of  current  production,  but  it 
economized  the  use  of  the  capital  which  would  have  been 
required  if  ornamentation  and  the  tool  of  exchange  had 
been  provided  from  independent  materials  and  therefore 
from  separate  funds  of  saved  capital. 

The  fact  that  the  capital  used  as  money  must  be  drawn 
from  accumulations  beyond  those  required  for  the  pur- 
poses of  current  production  brings  out  the  fundamental 
nature  of  the  proposition,  that  the  article  which  tended 
to  become  the  medium  of  exchange  and  standard  of  value 
was  the  superfluous  rather  than  the  strictly  necessary. 
It  must  be  an  article  of  universal  desire  in  the  realm  where 
it  is  employed  as  money.  Experience  has  shown  that 
such  a  universal  desire  is  directed  towards  the  ornamental 
as  much  as  the  useful,  and  that  the  desire  for  the  orna- 
mental has  the  additional  quality  of  being  practically  in- 
satiable. The  desire  for  any  staple  article  of  food  has 
limits,  and  the  production  ordinarily  does  not  go  much 
beyond,  and  even  falls  below,  the  demand  within  these 
limits.  A  surplus  of  food  for  exchange  was  not  a  usual 
phenomenon  in  primitive  societies,  and  only  rarely  could 
food  fulfil  the  requirements  of  money.  As  Mommsen  de- 
clares: 1 

"The  commodity  that  becomes  money  must  above  all 
things  not  be  one  that  is  indispensable  for  the  supply  of 
the  most  urgent  material  needs.  It  is  for  this  reason  that 

1  Histoire  de  la  Monnaie  Romaine,  Preface,  p.  xiv. 
37 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

in  no  country  has  corn  ever  been  used  as  the  comparative 
measure  of  the  value  of  other  merchandise ;  and  that  man- 
kind, after  having,  from  the  most  remote  antiquity,  suc- 
cessively and  in  various  countries  employed  as  money 
cattle,  iron,  and  copper,  have  uniformly  ended  with  silver 
and  with  gold." 

It  is  obvious  that  the  adoption  as  a  medium  of  exchange 
of  wheat  or  any  consumable  commodity  of  general  use 
would  result  in  extreme  perturbations  in  the  value  of  the 
medium  of  exchange  and  its  relation  to  all  other  articles. 
The  surplus  corn  or  wheat,  if  they  were  used  as  money, 
might  be  absorbed  by  consumption  in  any  given  year 
and  this  would  greatly  reduce  the  stock  available  for 
carrying  on  exchanges.  Only  some  article  which  is  not 
absolutely  necessary  for  the  ordinary  purposes  of  con- 
sumption, and  of  which  there  exists  a  surplus  stock  upon 
the  market,  meets  the  requirements  of  an  efficient  me- 
dium of  exchange. 

The  conception  of  money  as  a  store  of  value  followed 
the  development  of  the  spirit  among  men  of  prevision — 
care  for  the  future.  Some  of  the  first  stores  of  value  were 
undoubtedly  made  in  articles  of  general  use,  like  iron, 
cattle,  and  slaves,  before  the  surplus  of  savings  was  such 
as  to  permit  investment  in  ornament.  Such  forms  of 
capital  had  the  defect,  however,  that  they  were  not  of 
universal  desire  without  limit  in  time  and  amount.  The 
desire  for  them  as  simple  commodities — aside  from  their 
value  as  evidence  of  wealth — was  a  desire  which  was 
satiable.  It  became  desirable  that  the  store  of  value — 
the  fund  of  wealth  reserved  against  future  needs — should 
be  in  an  article  for  which  the  demand  was  insatiable.  As 
Carlile  describes  the  requirement  of  this  more  advanced 
social  stage : l 

"When  the  division  of  labor  had  made  some  consider- 
able progress,  then  provision  for  the  future  would  largely 

1  The  Evolution  of  Modern  Money,  p.  236. 
38 


THE    ORIGINS    OF    MONEY 

cease  to  be  of  this  direct  and  simple  character,  and  the 
commodity  which  would  then  best  secure  a  man's  future 
sustenance  and  well-being  would  not  be  so  much  the  com- 
modity best  adapted  for  immediate  utilization  by  him- 
self or  his  dependents  as  the  commodity  which  would  be 
most  efficient  in  securing  for  him  the  services  of  his 
neighbors  or  of  strangers  unconnected  with  him." 

Hence  emerges  the  vital  factor  in  the  choice  of  the 
metals  as  the  material  for  money,  that  they  represent  an 
article  for  which  the  demand  is  insatiable.  That  is  true 
to  a  large  degree  independently  of  their  functions  as  cur- 
rency. Gold  and  silver  turned  into  money  have  the 
quality  of  commanding  all  other  commodities.  Hence 
the  only  limit  imposed  upon  the  desire  for  their  acquisi- 
tion in  the  case  of  the  individual  is  the  sum  of  his  desires 
for  other  articles.  This  is  true  of  them  because  they  are 
money,  but  it  would  be  true  to  a  large  degree  even  if  they 
did  not  enjoy  by  legal-tender  laws  this  peculiar  function. 
Gold  and  silver  among  semi-civilized  peoples,  and  even 
at  the  present  day  among  those  who  are  civilized,  are 
among  the  most  highly  prized  articles  of  ornament.  It 
is  not  an  accident  that  articles  of  ornament,  seemingly 
useless  in  themselves,  have  been  used  as  money  under 
widely  different  conditions  among  barbarous,  semi-civi- 
lized, and  civilized  peoples.  The  desire  for  ornament,  for 
superfluous  wealth,  is  from  the  stand -point  of  the  economic 
man  a  desire  which  is  insatiable.  No  man,  at  least  the 
man  governed  purely  by  theoretical  economic  motives, 
fears  becoming  too  rich.  Money  in  its  abstract  sense 
stands  for  riches.  In  barbarous  societies  it  was  the  arti- 
cle used  as  money  in  its  concrete  sense  which  was  at  once 
the  symbol  and  the  substance  of  wealth.  Many  are  the 
cases  recorded  in  the  history  of  barbarous  peoples  where 
wires,  shells,  and  similar  articles  served  the  common  pur- 
pose of  ornament  and  of  money.  In  the  words  of  Babe- 
Ion:1 

1  Les  Origines  de  la  Monnaie,  p.  248. 
39 


THE    PRINCIPLES    OF    MONEY  AND    BANKING 

"Wherever  one  comes  across  man  on  the  surface  of  the 
globe,  one  finds  at  the  same  time  that  it  is  the  super- 
fluous which  by  instinct  seems  to  him  the  most  necessary. 
Man  has  scarcely  learned  the  use  of  clothes  before  he 
hangs  around  his  neck,  on  his  arms,  on  his  legs,  and  in  his 
ears,  necklaces,  bracelets,  rings,  and  pendants  of  every 
shape,  in  the  manufacture  of  which  the  precious  metals 
are  always  and  everywhere  preferred." 

In  India  and  China,  where  primitive  economic  condi- 
tions still  to  a  large  extent  prevail,  the  common  method 
of  hoarding  wealth  is  in  the  form  of  coins  strung  into 
bracelets  and  ornaments.  These  articles  can  be  readily 
used  as  money  in  times  of  famine  or  special  need.1  From 
this  primitive  instinct  for  the  superfluous  signs  of  wealth 
has  sprung  the  universal  desire  for  ornament — not  from 
its  intrinsic  utility,  but  as  a  mark  of  social  distinction  and 
personal  leadership.  The  millionaire,  who  goes  on  piling 
up  wealth  after  he  already  has  enough  to  command  every 
bodily  comfort,  is  actuated  by  the  same  motive  which 
governs  the  East  Indian  or  the  Chinaman  who  hoards 
silver  and  gold  that  he  may  be  known  as  the  richest  and 
most  powerful  among  his  fellow-men. 

The  scarcity  of  silver  and  gold  has  from  the  earliest 
times  made  their  possession  the  symbol  of  wealth  and 
power.  Hence  they  have  been  eagerly  sought  by  all 
who  have  desired  leadership  in  its  tangible  form  of  wealth 
or  in  the  form  of  political  and  military  prestige,  to  which 
the  possession  of  means  is  so  necessary  an  incident.  The 
desire  for  the  metals  became  coincident  with  the  desire 
for  all  other  things  in  primitive  times,  and,  therefore, 
practically  without  limit,  because  the  metals  were  ex- 

1  "The  women  of  the  tribes  on  the  borders  of  Thibet  are  always 
ready  to  use  portions  of  their  silver  ornaments  in  making  their 
purchases.  At  the  same  time,  whenever  they  get  any  money 
the  first  thing  they  do  is  to  buy  more  ornaments  with  it.  The 
ornaments  are  their  medium  of  exchange  and  their  store  of 
value." — Carlile,  Economic  Method  and  Economic  Fallacies,  p.  163. 

40 


THE    ORIGINS    OF    MONEY 

changeable  for  all  other  things.  The  search  for  the  pre- 
cious metals,  both  for  ornament  and  money,  was  an  early 
stimulus  to  foreign  trade.  Hauser  declares  that  it  was 
for  gold  as  much  as  for  grain  that  Athens  assumed  con- 
trol of  the  Milesian  colonies  and  that  she  founded  new 
ones  in  the  Crimea,  in  Thrace,  in  Epirus,  in  Thessaly,  in 
Macedonia,  and  at  Thasos.  She  scattered  over  the  shores 
of  the  sea  her  drachmas  of  silver,  extracted  from  the  mines 
of  Laurium,  and  exchanged  them  for  the  gold  of  Siberia 
and  of  the  Ural.  The  Phoenicians  founded  many  colo- 
nies in  the  west  in  order  to  be  near  the  mines.  How 
actively  their  quest  for  gold  stimulated  on  both  sides 
their  traffic  with  the  barbarians,  he  thus  sets  forth: 1 

"They  received  it  from  the  Arabian  caravans,  which 
traversed  the  desert  with  their  camels;  they  went  in 
search  of  it  in  southern  Egypt,  then  in  the  country  of 
Ophir,  perhaps  at  Zimbabye,  and  it  was  in  trading  from 
place  to  place  with  their  stuffs  of  purple  and  of  glass,  that, 
a  thousand  years  before  Gama,  they  are  said  to  have 
doubled  the  Cape  of  Good  Hope.  Tyrians,  Sidonians,  and 
Carthaginians  sold  also  the  gold  of  Spain  to  that  people 
of  metallurgists,  goldsmiths,  and  jewellers,  the  Etruscans, 
who  transformed  it  into  delicate  filagrees  and  graceful 
and  enduring  trinkets.  They  sold  it  to  the  Gauls,  greedy, 
like  all  barbarous  peoples,  for  gold.  To  buy  a  little  gold 
in  the  Phoenician  or  Greek  markets  of  the  Mediterranean, 
to  decorate  their  arms  and  limbs  with  bracelets  in  battle, 
the  Gallic  charioteers  traversed  with  their  heavy  chariots, 
over  trails  scarcely  marked,  the  thick  Celtic  forests,  and 
crossed  the  channels  of  Great  Britain  to  seek  the  tin  of 
the  Catterides  or  sought  even  farther  the  amber  of  the 
Baltic." 

Local  wants  or  national  prejudices  might  give  to  a  cer- 
tain article  the  character  of  money  at  home,  but  only  an 
article  of  universal  desire  would  serve  the  purpose  of  ex- 

1  L'Or,  p.  288. 
41 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

change  abroad.  Such  an  article  was  afforded  in  primi- 
tive times  by  anything  which  appealed  to  love  of  ostenta- 
tion. Hence  it  was  that  the  Phoenicians  found  a  ready 
market  for  their  brightly  colored  cloths,  necklaces,  rings, 
and  other  ornaments  among  savage  peoples.  But  among 
these  peoples,  as  among  those  more  advanced  in  civiliza- 
tion, gold  and  silver  became  the  highest  form  of  wealth. 
They  had  the  advantage  of  being  easily  concealed,  if  there 
were  need  of  it,  and  of  being  transformed  from  money 
into  ornament  and  ornament  into  money,  according  to 
the  exigencies  of  private  and  public  fortune.  German 
writers  in  the  Middle  Ages  point  to  the  wealth  of  the  Ger- 
man burghers  as  illustrated  by  their  rich  possessions  of 
gold  and  silver  plate.  One  of  the  best-known  writers  of 
the  time  mentions  that  "the  merchants  eat  off  dishes 
of  pure  silver  and  gold."  The  coins  of  that  time  were 
often  debased  and  of  uncertain  value,  and,  as  Schoenhof 
aptly  declares,  "Private  hoarding  in  this  form  is  the 
natural  consequence  of  such  a  state  as  existed  in  the 
Middle  Ages."  l  Plate  could  readily  be  converted  into 
money,  or  into  bullion,  the  equivalent  of  money.  The 
possession  of  plate  had,  in  the  average  mind,  a  much 
closer  connection  with  its  use  as  money  a  few  centuries 
ago  than  at  present.  Sir  Dudley  North  declared  that  "if 
every  one  had  plate  in  his  house  the  nation  would  then 
be  possessed  of  a  solid  fund  in  these  metals  which  all  the 
world  desires."  Jean  Bodin  alludes  to  a  proverb  current 
in  his  time  in  France,  "that  in  plate  one  loses  nothing  but 
the  fashion,"  and  Lord  Burleigh  in  his  will  left  his  plate 
to  be  distributed  among  the  legatees  by  weight,  just  as 
if  it  was  so  much  bullion.2 

The  choice  of  a  single  material  to  serve  as  money  was 
the  unconscious  elimination  of  less  desirable  means  of 
exchange  until  the  most  desirable  was  found.3  The  pro- 

1  A  History  of  Money  and  Prices,  p.  80. 
*Carlile,  The  Evolution  of  Modern  Money,  p.  247. 
•This  principle  is  recognized  by  Pantaleoni,  that  "the  choice  of 

42 


THE    ORIGINS    OF    MONEY 

ducer  of  an  article  having  a  very  limited  market  would 
naturally  be  willing  to  exchange  it  for  an  article  more 
generally  desired,  even  though  it  were  not  in  itself  the 
unit  of  exchanges.  This  principle  of  selection  was  well 
denned  by  Torrens  as  early  as  the  beginning  of  last  cen- 
tury : 2 

"Every  person  would  find  it  his  interest  to  keep  con- 
stantly by  him,  some  commodity,  which  being  of  known 
value,  and  of  universal  consumption,  would  be  readily 
received  by  his  neighbors  in  exchange  for  the  produce  of 
his  industry.  Now  when  men  had  seen  this  commodity 
frequently  employed  as  the  means  of  exchanging  other 
commodities,  they  would  become  willing  to  receive  a 
greater  quantity  of  it  than  was  necessary  for  their  own 
consumption,  under  the  confidence,  that  whatever  arti- 
cles they  might  require  could  at  any  time  be  procured 
for  it." 

Degrees  of  exchangeability  at  a  given  moment  vary 
within  the  widest  limits.  At  one  end  of  the  scale  of  ex- 
changeability in  modern  times  might  be  placed  unim- 
proved land  in  the  country  or  a  rare  work  of  art;  at  the 
other  end,  aside  from  actual  money,  might  be  placed  the 
securities  of  first-class  governments.  Degree  of  salability 
at  short  notice  at  an  economic  price — a  price  giving  fair 
returns  for  cost  —  marks  successive  articles  in  the  ap- 
proach towards  those  which  are  most  exchangeable. 
Thus  it  happened  that  several  articles  which  were  objects 
of  general  desire  might  serve  as  rude  tools  of  exchange 
at  the  same  time  in  the  same  community.  Iron,  having 
many  uses,  obtained  a  high  place  as  a  medium  of  ex- 
change in  the  heroic  ages.  Caesar  found  iron  and  copper 
bars  in  use  as  money  in  Brittany,  and  they  are  still  used 

one  determinate  thing,  in  preference  to  many  other  possible  things, 
as  a  medium  of  exchange  is  effected — like  the  choice  of  any  other 
direct  commodity,  among  many  possible  ones,  for  the  satisfaction 
of  a  direct  want — by  natural  selection." — Pure  Economics,  p.  225. 
*  Money  and  Paper  Currency,  p.  5. 

43 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

in  Cambodia  and  Thibet.  Among  the  Kaffirs  iron  lances 
were  long  highly  valued  as  money.  The  general  desire 
for  cheap  fabrics  and  decorations  among  barbarous  peo- 
ples who  have  begun  to  trade  with  civilized  nations  has 
often  been  noted.  It  made  the  fabrics  and  ornaments 
of  Tyre  a  form  of  money  in  the  hands  of  her  traders  in 
dealing  with  the  people  of  Africa. 

All  these  facts  point  to  the  gradual  recognition  of  the 
principle  laid  down  by  Menger,  that  "the  commodities 
which  under  given  local  and  time  relations  are  most 
salable,  have  become  money  among  the  same  nations  at 
different  times  and  among  different  nations  at  the  same 
time."  l  The  material  of  money  in  its  earliest  forms  was 
simply  the  most  desirable  object  of  barter.  "The  pre- 
cious metals,"  in  the  language  of  De  Greef,  "were  them- 
selves merchandise  entering  into  the  general  system  of 
barter  before  being  devoted  to  their  special  functions  as 
measures  of  value  and  intermediary  of  exchanges." 
But  a  long  process  of  evolution  was  traversed  before  the 
precious  metals,  even  by  weight,  became  the  standard, 
and  another  long  process  before  private  marks  of  weight 
and  fineness  developed  into  official  coinage.  The  process 
of  this  evolution  is  well  set  forth  by  Bullock: 3 

"  In  this  way  the  universally  acceptable  commodity  ac- 
quires a  new  and  distinct  use.  Hitherto  it  was  valued 
simply  as  an  object  of  personal  consumption;  now  it  is 
demanded  also  as  a  means  of  facilitating  exchanges.  For- 
merly it  was  a  common  commodity ;  now  it  is  a  peculiar 
commodity  possessing  a  special  function — namely,  the 
function  of  serving  as  a  general  medium  of  exchange. 
Whenever  a  commodity  acquires  this  function,  it  becomes 
money." 

1  "On  the  Origin  of  Money,"  in  The  Economic  Journal  (June, 
1892),  II.,  p.  252. 

2  "La  Monnaie,  le  Credit  et  les  Banques,"  in  Annales  de  I'ln- 
stitut  des Sciences  Societies  (1897),  III.,  p.  225. 

3  Introduction  to  the  Study  of  Economics,  p.  211. 

44 


The  respect  in  which  the  precious  metals  differ  from 
other  commodities  is  one  of  degree  and  not  of  kind.  They 
possess  the  highest  degree  of  exchangeability.  Gold  and 
silver  have  become  in  developed  commercial  countries 
the  material  of  money  by  the  operation  of  a  branch  of 
the  law  of  marginal  utility — the  law  that  the  object  most 
useful  for  a  given  purpose  in  any  community  will  grad- 
ually exclude  the  use  of  other  objects.  The  evolution  of 
money  began  with  the  perception  of  degrees  of  salable- 
ness  of  commodities.  Perishable  goods  and  those  of 
limited  consumption  are  "merchandise"  in  the  sense  of 
being  readily  exchangeable,  only  for  the  interval  that 
they  are  in  the  hands  of  the  dealer.  "Money,"  says 
Favre,  "  consists  at  the  beginning  in  objects  which  might 
become  merchandise.  Its  mobility  is  beyond  doubt,  but 
that  which  distinguishes  it  in  a  decisive  manner  from 
merchandise  is  the  character  (admitted  in  theory,  if  not 
a  reality)  of  perpetual  movement  and  absolute  mobility — 
which  exists  of  itself  and  not  for  a  transitory  period."  l 
In  the  natural  contest  for  such  a  service  the  precious 
metals  prevailed  by  a  process  of  economic  selection  which 
Menger  thus  described :  2 

"With  the  extension  of  traffic  in  space  and  with  the 
expansion  over  ever  longer  intervals  of  time  of  prevision 
for  satisfying  material  needs,  each  individual  would  learn, 
from  his  own  economic  interests,  to  take  good  heed  that 
he  bartered  his  less  salable  goods  for  those  special  com- 
modities which  displayed,  beside  the  attraction  of  being 
highly  salable  in  the  particular  locality,  a  wide  range  of 
salableness  both  in  time  and  place.  These  wares  would 
be  qualified  by  their  costliness,  easy  transportability, 
and  fitness  for  preservation  (in  connection  with  the  cir- 
cumstance of  their  corresponding  to  a  steady  and  widely 
distributed  demand),  to  ensure  to  the  possessor  a  power, 

1  "La  Genese  de  1'Argent,"  in  Revue  d' Economic  Politique  (April, 
1899),  XIII.,  p.  362. 
*  Economic  Journal  (June,  1892),  II.,  p.  248. 

45 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

not  only  'here'  and  'now,'  but  as  nearly  as  possible  un 
limited  in  space  and  times  generally,  over  all  other  mar- 
ket goods  at  economic  prices.  And  so  it  has  come  to  pass, 
that  as  man  became  increasingly  conversant  with  these 
economic  advantages,  mainly  by  an  insight  become  tra- 
ditional, and  by  the  habit  of  economic  action,  those  com- 
modities, which  relatively  to  both  space  and  time  are 
most  salable,  have  in  every  market  become  the  wares, 
which  it  is  not  only  in  the  interest  of  every  one  to  accept 
in  exchange  for  his  own  less  salable  goods,  but  which  also 
are  those  he  actually  does  readily  accept." 

Money,  therefore,  has  attained  its  present  position  as 
a  tool  of  exchange  by  a  process  of  evolution  from  less 
exchangeable  commodities.  It  was,  as  Menger  declares, 
"the  spontaneous  outcome,  the  unpremediated  resultant 
of  particular,  individual  efforts  of  the  members  of  a  so- 
ciety, who  have  little  by  little  worked  their  way  to  a 
discrimination  of  the  different  degrees  of  salableness  in 
commodities."  Modern  political  economy  tends  more 
and  more  to  appreciate  such  evolutions  rather  than  to 
apply  abstract  standards  in  the  judgment  of  past  ages. 
It  is  not  surprising,  in  view  of  the  universal  exchange- 
ability of  gold  and  silver,  that  they  were  considered,  at 
the  dawn  of  modern  commerce,  when  paper  titles  were 
less  secure  than  at  present  and  credit  had  not  reached 
its  full  development,  as  the  most  desirable  form  of  wealth. 
Money  was  for  the  individual  the  highest  form  of  wealth, 
and  by  a  natural  error  the  mercantilists  regarded  it  as 
the  great  object  of  national  accumulation.  It  remained 
for  the  modern  age  to  fully  accept  the  view  that  money, 
while  the  most  exchangeable  form  of  wealth,  is  by  that 
very  fact  the  tool  of  exchanges  and  not  their  object. 

The  conclusive  evidence  that  exchangeability  is  a  vital 
requirement  in  money  is  afforded  by  reversion  to  barter 
or  to  the  estimation  of  money  by  weight  which  has  oc- 
curred when  the  standard  has  been  too  much  tampered 
with.  It  was  noted  by  Adam  Smith  that  money  was  re- 

46 


THE    ORIGINS    OF    MONEY 

ceived  at  the  exchequer  by  William  the  Conqueror  by 
weight  and  not  by  tale,  and  there  is  reason  to  believe  that 
payments  were  made  in  this  way  up  to  the  time  of  the  re- 
form of  the  coinage  in  the  time  of  Elizabeth.1  All  through 
the  Middle  Ages  experience  verified  the  maxim  of  Nichol- 
son, that  "most  governments  have  found  when  they  tried 
to  enforce  an  unpopular  change  in  the  standard  (to  bene- 
fit, for  example,  by  fiat  money)  that  the  people  have  re- 
sorted to  bargains  on  the  old  standard."2 

Midst  the  bewildering  debasements  of  the  French  coin- 
age under  Philippe  le  Bel  contracts  escaped  recurrence  to 
pure  barter  by  stipulating  for  gold  or  silver  of  the  weight 
and  value  of  the  time  of  St.  Louis.  Public  opinion  ad- 
hered to  the  opinion  that  money  was  merchandise  and 
that  if  the  government  issued  debased  pieces  they  should 
be  received  only  at  their  intrinsic  value.  The  princes  had 
not  the  means  they  would  have  had  at  the  present  day 
for  forcing  their  debased  pieces  into  circulation,  and  their 
frequent  alterations  of  the  coinage,  instead  of  affecting 
the  entire  economic  system,  had  only  the  character  of  a 
local  bankruptcy,  at  places  where  the  new  pieces  were 
paid  for  public  obligations.3 

On  many  occasions  where  paper  money  has  been  forced 
into  circulation  to  excess  and  made  legal  tender  by  law, 
the  same  phenomenon  of  recurrence  to  barter  or  to  con- 
tract for  delivery  of  the  precious  metals  by  weight  has 
demonstrated  the  fundamental  conviction  of  merchants 
that  money  was  a  commodity  deriving  its  value  from  the 
material  of  which  it  was  composed.4 

1  Rogers'  edition,  Wealth  of  Nations,  I.,  p.  27. 

2  Principles  of  Political  Economy,  II.,  p.  101. 

3  Avenel,  pp.  52,  53. 

4  This  was  the  case  with  the  Rhode  Island  paper  money  of 
1786.     McMaster  says  that  the  traders  "closed  their  shops  or 
disposed  of  the  stock  by  barter.     For  a  time  business  was  at  an 
end,  and  money  almost  ceased  to  circulate  except  among  the 
supporters  of  the  bank.     Rent  was  paid  in  grain;  nor  was  it  by 
any  means,  in  some  towns,  a  rare  thing  to  see  cobblers  exchang- 

47 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

Organized  exchange,  therefore,  by  the  use  of  money  has 
followed  an  evolution  which  has  been  slow  and  is  not  yet 
complete.  Upon  some  of  the  steps  of  this  evolution  light 
is  thrown  by  a  cursory  glance  at  economic  history.  Prim- 
itive society,  even  that  of  the  Middle  Ages,  had  little  use 
for  money  while  the  household  and  the  community  were 
self-sufficing.  This  was  the  system  which  prevailed  to  a 
large  extent  in  Greek  and  in  Roman  society,  even  after 
the  creation  of  cities  and  the  development  of  interna- 
tional trade  had  opened  certain  markets  for  coined  money. 
How  different  was  the  financial  organization  of  society 
under  such  conditions  from  the  modern  capitalistic  sys- 
tem is  thus  set  forth  by  Bucher:  * 

"That  which  in  modern  theory  it  is  the  custom  to  call 
'circulating  capital'  is  in  the  system  of  household  econo- 
my only  a  simple  fund  in  process  of  use  which  awaits  con- 
sumption. It  is  a  product  unfinished  or  only  half  finished. 
In  the  regular  course  of  this  economy  there  exist  neither 
merchandise  nor  prices,  neither  circulation  of  goods  nor 
distribution  of  income,  and  hence  (as  special  forms  of  in- 
come) neither  wages,  nor  the  profits  of  management,  nor 
interest." 

It  is  not  improbable  that  the  material  found  most 
acceptable  in  exchange  and  as  a  badge  of  wealth  was 
employed  at  first  for  the  payment  of  fines,  taxes,  and 
religious  contributions  rather  than  for  the  purchase  of 
necessaries.  Food  and  shelter,  indeed,  probably  re- 
mained the  common  property  of  the  community  in  primi- 
tive society  until  after  the  idea  had  begun  to  take  form 
that  the  right  of  private  property  could  be  asserted  in 

ing  shoes  for  meat,  and  shopkeepers  taking  cords  of  wood  for 
yards  of  linen." — History  of  the  People  of  the  UnitedStates,  I., p.  333. 
1  Etudes  d'Histoire  et  d'Economie  Politique,  p.  75.  A  striking 
proof  of  the  differences  between  the  ancient  economy  and  the 
modern  is  found  by  Bucher  in  the  fact  that  even  the  names  are 
lacking  in  early  Latin  and  Greek  for  modern  financial  concep- 
tions. Merces  is  used  indiscriminately  for  wages,  rental,  interest 
on  capital,  and  price. 

48 


THE    ORIGINS    OF    MONEY 

arms  and  ornaments.  As  distinction  in  these  respects 
was  a  means  of  attracting  women  and  commanding  the 
envy  of  men,  it  is  not  unlikely  that  ornaments  were  em- 
ployed in  obtaining  wives,  and  that  the  marriageable 
daughters  of  a  family  were  the  first  objects  of  ex- 
change.1 

From  the  moment  that  money  became  known,  its  pos- 
sessor enjoyed,  even  in  communities  where  its  use  was 
not  widely  spread,  the  benefits  naturally  belonging  to  a 
commodity  which  commands  all  others.  In  Egypt, 
where  payment  of  taxes  in  kind  was  maintained  even 
under  the  successors  of  Alexander  the  Great,  the  tax- 
farmers  took  the  produce  off  the  hands  of  the  farmer  and 
contracted  for  a  money  payment  to  the  state.  Thus  the 
tax-farmers,  as  Cunningham  declares,  "came  in  as  specu- 
lators in  raw  produce;  their  intervention  facilitated  the 
collection  of  a  money  revenue  without  compelling  the 
peasant  to  pay  in  money."  2 

The  high  utility  of  money  resulting  from  its  peculiar 
qualities  gave  great  power  in  ancient  times  and  in  the 
Middle  Ages  to  those  who  possessed  it.  The  possession  of 
circulating  capital  and  actual  metallic  money — too  often 
confounded  by  careless  students  in  modern  times — were 
almost  necessarily  the  same  thing  under  economic  condi- 
tions where  there  was  no  other  means  of  storing  value  in 
a  negotiable  form.  Hence  the  possessor  of  money  had  a 
lien  upon  the  possessions  of  his  neighbors  which  was 
much  more  strongly  felt  than  even  under  the  acute  con- 
ditions of  modern  industrial  competition.  In  the  Roman 
Empire  it  was  the  farmers  of  the  taxes  and  the  money- 
lenders who  were  the  men  of  power.  In  the  provinces  in 
the  declining  days  of  the  empire  the  land -owners,  un- 
able to  pay  the  accumulating  taxes,  could  borrow  only 
from  the  men  whose  relations  with  the  official  classes 

1  Con.    passages    from    Schurtz,   quoted   by    Carlile,  Economic 
Method  and  Economic  Fallacies,  pp.  148,  et  seq. 
1  Western  Civilization,  I.,  p.  129. 
i.-4  49 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

and  the  tax-gatherers  put  them  in  command  of  ready 
money.1 

When  the  system  of  slavery  was  succeeded  in  the 
Middle  Ages  by  the  occupation  of  the  lands  of  the  west  by 
the  Goths,  Vandals,  and  the  Germanic  tribes  which  over- 
ran the  Roman  Empire,  the  subdivision  of  labor  in  the 
family  group  continued  to  obviate  the  need  for  money. 
Local  groups  aided  each  other  in  work  too  heavy  for  a 
single  group,  and  the  feudal  system  brought  an  enlarge- 
ment and  consolidation  of  the  family  group,  and  there- 
by continued  a  sufficient  subdivision  of  labor,  without 
creating  the  need  for  formal  exchanges  between  groups.2 
Gradually,  no  doubt,  the  field  of  exchange  extended  as 
certain  raw  materials  came  to  be  needed  for  spinning  and 
weaving,  and  as  a  surplus  of  production  permitted  the 
exchange  of  this  surplus  for  foreign  luxuries.  But  through- 
out antiquity,  and  even  down  to  the  nineteenth  century, 
the  principal  exchanges  in  foreign  trade  were  exchanges 
of  superfluities  and  luxuries — not  exchanges  of  necessary 
food  or  of  the  raw  materials  and  finished  products  of 
staple  manufactures.  They  were  events  touching  only 
the  surface  of  the  organization  of  domestic  industry — 
not  reaching  down  to  its  depths,  like  the  organized  for- 
eign trade  of  the  nineteenth  century.3 

The  function  of  the  state  in  the  beginning  was  to  give 
the  stamp  of  honesty,  weight,  and  purity  to  the  metals 
which  had  before  been  transferred  by  weight  or  by  the 
guarantee  of  individuals.  This  function  would  not 
have  been  effective  in  creating  money  if  it  had  been 
abused  at  its  birth.4  It  was  because  of  the  credit  which 
was  given  to  the  metal  by  the  government  stamp  when 
it  certified  to  the  truth  that  it  became  possible  to  abuse 

1  Dill,  Roman  Society  in  tlie  Last  Century  of  the  Western  Empire, 
p.  266.  2  Bucher,  p.  54.  *  Ibid.,  p.  71. 

4  "This  essential  point  has  not  been  emphasized  enough — that 
if,  in  the  beginning,  the  imprint  had  not  been  scrupulously  hon- 
est, it  would  not  have  created  money." — Block,  II.,  p.  36. 


THE    ORIGINS    OF    MONEY 

this  credit  in  later  centuries  to  certify  to  falsehood.  Up 
to  the  first  employment  of  money  coined  by  the  state, 
the  process  of  evolution  is  well  described  by  Babelon,  who 
has  studied  so  profoundly  the  origins  of  the  medium  of 
exchange: * 

"From  the  moment  that  the  standard  or  measure  of 
value  became  at  the  same  time  a  real  equivalent,  it  is 
natural  that  all  peoples  in  the  progress  of  their  civiliza- 
tion should  have  sought  a  standard  which  was  a  more  and 
more  perfect  equivalent.  It  has  been  without  scientific 
calculation,  directed  only  by  the  commercial  necessity 
of  giving  in  payments  the  exact  value  of  objects  and  by 
the  innate  instinct  of  progress,  that  they  have  abandoned 
defective  standards  for  the  adoption  of  others  less  special 
and  more  convenient.  Step  by  step  this  research,  every- 
where pursued,  has  led  all  by  different  routes  to  the  same 
result — the  adoption  of  gold  and  silver.  After  exchanges 
in  natural  products  came  cattle-money,  then  utensil- 
money,  then  iron,  copper,  gold,  and  silver  counted  by 
weight;  finally,  money  of  copper  or  iron,  which  in  the  last 
resort  yielded  its  place  to  money  of  silver  or  gold.  Such 
was  the  gradual  and  progressive  march  followed  in  the 
entire  Greek  world  and  in  ancient  Italy  by  the  standard, 
the  equivalent  of  all  things  which  are  sold  or  bought." 

We  find  money,  therefore,  developing  by  a  long  proc- 
ess of  evolution,  step  by  step  with  the  progress  of  society. 
Originating  in  the  need  for  a  common  denominator  of 
other  exchanges,  the  article  upon  which  fell  the  final 
choice  of  each  local  society  was  that  which  was  gradually 
selected  from  other  commodities  as  the  most  exchange- 
able. This  choice  inevitably  fell,  unless  diverted  by 
special  circumstances,  upon  those  articles  which  were 
sought  as  the  visible  evidence  of  wealth,  above  and  be- 
yond that  required  for  the  needs  of  daily  subsistence, 
and  therefore  upon  articles  for  which  the  demand  was  not 

*  Les  Origines  de  la  Monnaie,  p.  230. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

limited  by  the  wants  of  the  body,  but,  through  the  ever- 
expanding  wants  and  ambitions  of  civilized  men,  was  a 
demand  insatiable  in  its  nature,  unlimited  in  time  or 
space.  Inevitably  the  precious  metals  emerged  from  the 
body  of  all  other  commodities  as  conforming  best  to  these 
requirements  in  character  and  meeting  best  the  condi- 
tions of  an  efficient  tool  of  exchange.  Society,  having 
found  such  a  tool,  as  it  acquired  the  command  over  iron 
and  stone  through  generations  of  travail  and  blind  grop- 
ing to  adapt  means  to  ends,  stood  at  last  upon  the  thresh- 
old of  modern  industrial  development,  fully  equipped 
for  the  division  of  labor,  the  accumulation  of  capital  in 
a  transferable  form,  and  the  freedom  of  the  individual  to 
contract  for  goods  and  services  in  money  instead  of  being 
bound  by  personal  servitude  to  the  land  or  the  work- 
bench. Money,  therefore,  stands  forth,  along  with  a  few 
other  steps  in  the  evolution  of  society,  as  one  of  the  most 
potent  of  the  factors  of  our  modern  industrial  civilization. 


IV 

THE   EVOLUTION   OF    METALLIC   MONEY 

Early  foreign  trade  consisted  largely  of  barter — Use  of  cattle  as* 
money  in  early  Greece — Adaptation  of  money  types  to  local 
conditions — The  use  of  kettles  in  the  heroic  ages — The  Spartan 
money  of  iron — Gradual  evolution  of  state  coinage — Theories 
as  to  the  inventor  of  coined  money — Conflicting  claims  of 
Lydia  and  yEgina  —  Rapid  extension  of  the  use  of  money 
among  the  civilized  peoples  of  antiquity. 

IN  the  last  chapter  has  been  set  forth  the  philosophy 
of  the  gradual  adoption  of  coined  pieces  of  gold  and 
silver  as  the  medium  of  exchanges  in  civilized  states; 
it  remains  to  discuss  briefly  the  actual  evolution  of  the 
use  of  money  within  historic  times  and  in  times  pre- 
historic so  far  as  light  is  thrown  upon  them  by  the  en- 
during testimony  of  utensils,  coins,  and  monuments. 

The  earliest  communities  apparently  lived  upon  the 
communistic  basis,  obtaining  and  using  food  in  common. 
When  property  rights  emerged  from  these  conditions,  it 
is  probable  that  accumulation  of  private  property  first 
began  in  the  form  of  articles  of  personal  adornment. 
These  came  to  possess  an  attraction  to  savage  eyes 
which  gave  them  a  high  marginal  utility  in  exchange,  in 
spite  of  their  comparatively  low  utility  in  the  scale  of 
objects  necessary  to  sustain  life.1  The  first  objects  of 
this  sort,  like  shells,  pieces  of  metal,  pearls,  and  teeth  of 
animals,  had  currency  chiefly  within  the  tribe.  It  was 
only  as  objects  came  into  use  which  were  found  accept- 

1  Favre,  "  La  Genesc  de  1*  Argent,"  in  Revue  d' Economic  Politique 
(April,  1899),  XIII.,  p.  361. 

53 


THE  PRINCIPLES  OF  MONEY  AND   BANKING 

able  by  other  tribes  in  mutual  exchanges  that  an  inter- 
national money  became  possible.  Trade  between  tribes 
involves  long  strides  beyond  primitive  conditions,  be- 
cause it  implies  the  production  of  valuable  goods  in  ex- 
cess of  domestic  needs,  the  respect  for  inter-tribal  rights, 
and  the  organization  of  a  system  of  exchange. 

There  was  an  obvious  advantage  in  barter  in  the  con- 
duct of  commerce  between  different  peoples  in  ancient 
times,  as  there  is  in  the  foreign  commerce  of  to-day,  in 
the  fact  that  it  permitted  a  vessel  to  go  both  ways  with 
a  full  cargo,  instead  of  going  loaded  in  one  direction  and 
returning  with  nothing  but  a  quantity  of  gold  or  silver. 
Even  to-day,  in  the  language  of  Babelon,  "The  African 
caravans,  those  ships  of  the  desert,  which  bring  to  the 
ports  of  the  sea-coast  the  natural  products  of  the  interior, 
return  equally  loaded,  not  with  pieces  of  gold,  but  with 
the  merchandise  which  they  have  received  from  Euro- 
peans in  exchange  for  that  which  they  have  delivered."  * 
The  commerce  of  the  Phoenicians  was  substantially  of 
this  sort  of  barter.  Taking  out  from  Tyre  and  Sidon 
stuffs  of  purple,  glass,  and  jewels,  they  brought  back  in 
exchange  the  natural  products  of  Africa,  Spain,  and  Gaul, 
and  sometimes  slaves  captured  in  war. 

Exchanges  of  goods  were  necessary,  almost  from  the 
most  primitive  times.  Under  the  walls  of  Troy  the  Greeks 
bought  wine  from  Lemnos,  paying  for  it  with  copper  and 
iron,  with  hides  and  cattle.  The  great  fairs  of  antiquity 
and  the  Middle  Ages  permitted  large  exchanges  of  goods 
by  barter,  with  the  intervention  of  only  limited  amounts 
of  money.  The  Hanseatic  League  established  comptoirs, 
or  magazines,  all  over  Northern  Europe  in  the  fourteenth 
century,  where  great  quantities  of  goods  were  stored  for 
exchange.  At  Novgorod,  in  Russia,  it  was  forbidden  by 
the  laws  of  the  league  to  pay  money  for  balances,  but 
they  must  all  be  settled  by  the  delivery  of  Hanseatic  goods.2 

1  Les  Origines  de  la  Monnaic,  p.  17. 

1  Blanqui,  I.,  p.  205.     Roscher  declares  that  in  Rhokand  until 

54 


THE  EVOLUTION  OF  METALLIC  MONEY 

The  Greeks  of  the  Homeric  times  gradually  tended  to 
cattle  as  their  standard  of  value.  Prices  and  charges 
were  fixed  in  cattle  among  them,  as  among  nearly  all 
peoples  leading  a  pastoral  life.  A  woman  slave  who  was 
a  good  worker  was  worth  four  oxen.  Comparing  the 
arms  of  Glaukos  to  those  of  Diomedes,  Homer  says  that 
the  first  were  worth  100  oxen  and  the  others  only  nine. 
Parents  who  sold  their  daughters  to  their  husbands  re- 
ceived a  certain  number  of  heads  of  cattle.  The  laws 
of  Draco  fixed  fines  and  rewards  in  oxen.  For  kill- 
ing a  wolf,  one  received  an  ox  or  a  sheep.  From  this 
general  adoption  of  cattle  as  the  unit  of  exchange  came 
the  names  of  the  first  Greek  money.1  The  word  for 
cattle  became  synonymous  with  money,  and  in  the  times 
of  ^Eschylus  it  was  a  proverb,  regarding  the  man  whose 
silence  was  bought  with  money,  that  he  had  "  an  ox  upon 
his  tongue."  The  Greek  peoples  were  not  the  only  ones 
where  the  name  of  cattle  or  the  herd  became  by  exten- 
sion the  term  for  money.  The  Sanscrit  word  roupa,  the 
basis  of  the  modern  rupee  of  India,  is  derived  from  the 
word  for  herd  (carried  into  French  as  troupeau;  English, 
troop).  At  Rome,  also,  in  the  early  days  of  the  monarchy, 
cattle  were  the  standard  of  value,  and  one  ox  was  equal 
to  ten  lambs.  For  small  offences  fines  were  imposed  of 
two  sheep,  while  in  graver  cases  the  maximum  might  rise 
to  thirty  oxen. 

The  evidence  of  etymology  goes  far  to  sustain  the  con- 
tention of  Ridgeway  that  the  ox  or  cow  was  the  unit  of 
value  in  primitive  pastoral  societies.2  The  Latin  word 

the  end  of  the  eighteenth  century,  as  the  result  of  barter,  the 
cities  "presented  the  appearance  of  a  fair  the  whole  year  round." 
— Principles  of  Political  Economy,  I.,  p.  340. 

1  Ridgeway  maintains  that  the  Attic"  talent"  was  the  equivalent 
in  value  of  an  ox,  whence  the  identification  of  the  talent  with 
oxen  in  the  laws  of  Draco  and  the  interchangeable  use  of  the 
terms  ox  and  talent  for  the  monetary  unit.  —  The  Origin  of 
Metallic  Currency  and  Weight  Standards,  pp.  6-9. 

3  Ibid.,  pp.  47-53.     Substantially   the  same  view  is  taken  by 

55 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

pecus,  meaning  cattle,  became  the  equivalent  of  money, 
and  the  root  of  the  word  pecunia,  from  which  is  derived 
the  English  word  pecuniary.  Among  the  Romans  the 
counting  of  cattle  by  the  head,  and  the  fact  that  herds 
were  synonymous  with  riches,  laid  the  basis  of  the  mod- 
ern use  of  the  word  capital.  In  Germany  the  laws  of 
the  barbarians  made  cattle  the  money  standard,  and  the 
word  signifying  a  herd  (in  German,  Vieh)  became  the 
basis  of  the  Anglo-Saxon  word  fee,  in  the  sense  of  a  sal- 
ary. In  Ireland  payments  were  made  by  horned  beasts, 
and  a  woman  slave  was  estimated  to  be  worth  three 
cows.  Even  in  countries  where  cattle  had  lost  much  of 
their  original  value  in  use,  the  ox  or  cow  continued  to 
occupy  a  peculiar  position,  indicating  that  it  had  once 
been  the  chief  representative  of  wealth.  In  Egypt,  says 
Ridgeway,  "their  ancient  esteem  for  the  cow  as  one  of 
their  chief  means  of  subsistence  survived  only  in  relig- 
ious observances.  So,  too,  in  modern  India  the  rever- 
ence for  the  sacred  cow,  among  a  people  who  regard  as 
an  abomination  the  eating  of  beef,  is  a  survival  from  the 
time  when  in  a  more  Northern  clime  cattle  formed  the 
principal  wealth  of  their  forefathers."  The  use  of  the 
cow  unit  was  so  well  established  among  the  ancient 
Hindoos  that  separate  values  were  put  upon  calves  and 
heifers  of  different  ages,  but  these  values  all  had  fixed 
relations  to  each  other. 

Other  objects  of  exchange  were  employed  among  peo- 
ple who  had  not  large  pastoral  wealth  and  who  were  com- 
pelled to  live  by  hunting  and  fishing.  In  Iceland  an 
edict  rendered  as  late  as  1413  established  a  schedule  of 
prices  in  dried  fish,  twenty  horseshoes  being  worth  twenty 
fish;  a  pair  of  woman's  socks,  three  fish;  a  half-pound  of 
lard,  five  fish.1  Furs  and  skins  fulfilled  the  mission  of 
money  around  Hudson's  Bay  during  the  years  of  the  pre- 

Lenormant,  one  of  the  highest  authorities  on  the  subject. — La 
Monnaie  dans  I'Antiquite,  I.,  p.  74. 
1  Babelon,  p.  8. 

56 


THE  EVOLUTION  OF  METALLIC  MONEY 

dominance  of  the  Hudson  Bay  Company,  and  among  the 
natives  the  same  word,  raha,  signified  at  once  a  skin  and 
money.  In  Russia  skins  were  used  in  the  Middle  Ages 
for  money,  and  the  word  kung,  money,  means  marten. 
'.'By  degrees,"  says  Roscher,  "it  came  to  pass  that  in- 
stead of  whole  skins  only  two  'snouts'  were  given  or 
other  pieces  of  leather  about  a  square  inch  in  size,  which 
were  probably  stamped  by  the  government  and  redeemed 
in  whole  skins  at  the  government  magazines." *  The 
Mongolian  conquerors  would  not  recognize  this  symbolic 
money,  and  it  became  valueless. 

Tobacco  was  the  standard  of  value  in  Virginia  in  the 
early  days  of  the  colony,  and  even  down  to  a  recent 
time  squares  of  pressed  tea  were  the  unit  in  parts  of 
China.  The  Indians  of  the  United  States  and  Canada 
employed  wampum,  which  was  made  by  the  combination 
of  two  shells  gathered  upon  certain  shores  of  the  Gulf  of 
Mexico.  The  black  or  violet  had  double  the  value  of 
white  shells.  This  wampum  money  was  adopted  even 
by  the  white  colonists  as  token  money  and  served  as  a 
legal  tender  in  Canada  and  other  provinces  until  1670. 
It  was  often  used  by  general  consent  after  that  date,  and 
the  Indians  did  not  give  it  up  until  early  in  the  nineteenth 
century.  A  severe  shock  was  given  to  the  security  of 
the  monetary  system  when  some  European  manufact- 
urers set  to  work  to  counterfeit  wampum  by  bits  of  glass, 
which  even  among  the  Indians  quickly  depressed  its  pur- 
chasing power.  Salt  has  been  often  employed  as  money 
and  is  still  a  favorite  currency  in  central  Africa.  It  is  car- 
ried by  the  caravans  into  the  interior,  increasing  in  value 
according  to  distance  from  the  sea.  Four  heavy  bars, 
of  the  length  of  the  arm  and  hand,  two  hands  in  breadth 
and  a  hand  and  a  half  in  thickness,  make  the  load  of  an 
ass.  In  Timbuctoo  it  requires  nearly  a  dozen  of  these 
bars  to  buy  a  slave,  but  in  other  sections  three  bars  are 

1  Principles  of  Political  Economy,  I.,  p.  352. 
57 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

sufficient.  Slaves  are  also  employed  as  money  in  Africa, 
but  often  as  a  standard,  or  money  of  account,  rather  than 
as  the  actual  medium  of  exchange.  This  conventional 
value  of  the  slave  in  the  Soudan  is  about  100  francs  ($20), 
and  when  a  cavalier  says  that  a  horse  cost  him  three 
slaves  he  is  quite  as  likely  to  refer  to  the  slave  as  a  stand- 
ard as  to  imply  an  actual  transfer  of  slaves.1 

Several  steps  may  be  traced  in  the  evolution  of  money. 
First,  there  was  simple  barter;  second,  there  was  a  ten- 
dency towards  the  adoption  of  a  common  denominator  in 
the  form  of  a  single  article,  like  an  ox  or  a  sheep;  third, 
there  was  the  employment  of  metal  in  the  form  of  bars 
or  utensils  either  by  actual  weight  or  the  use  of  certain 
pieces  of  metal  by  tale,  or  number;  fourth,  there  was  the 
imprint  of  the  private  mark  of  some  merchant  or  coiner 
highly  respected  for  his  honesty;  and,  finally,  there  was 
the  certification  of  the  value  of  the  money  by  the  state. 
There  was  not  in  any  of  these  processes  the  assumption 
of  the  right  of  the  state  to  create  money  by  its  stamp  in 
contravention  of  its  actual  value  in  exchange  as  fixed  by 
the  evolution  of  society. 

The  article  used  as  money  in  each  community  has  been 
an  article  adapted  to  its  degree  of  civilization  and  highly 
prized  as  a  commodity.  Such  articles  have  not  often 
been  chosen  by  chance,  but  have  conformed  to  the  mone- 
tary conditions  of  the  time.  A  correspondent  of  the 
French  Colonial  Union,  which  began  in  1898  the  collec- 
tion of  examples  of  the  primitive  money  of  Africa,  wrote 
that  the  monetary  types  employed  there  combined  al- 
most always  these  three  conditions:  (i)  The  product  in- 
vested with  the  money  function  exists  in  abundance  on 
the  market;  (2)  it  is  of  current  consumption  and  its  value 
is  preserved  by  the  relative  equilibrium  of  production  and 
consumption;  and  (3)  it  is  capable  of  minute  subdivision, 
at  least  to  the  point  of  adaptation  to  the  smallest  trans- 

'A-de  Foyille, in L'EconomisteFranfais  (August  27, 1898),  p.  278. 

58 


THE  EVOLUTION  OF  METALLIC  MONEY 

actions.1  Gold  in  powder  or  grains  is  the  medium  of  ex- 
change in  certain  privileged  regions,  but  it  is  too  costly 
a  medium  for  the  miserable  tribes  of  interior  Africa.  They 
use  cowries,  or  shells,  of  which  it  requires  20,000  to  equal 
the  value  of  twenty  francs  ($4) .  The  use  of  pieces  of  bull- 
ion and  utensils  of  metal  for  money  was  the  third  stage  in 
monetary  development,  coming  after  barter  and  the  use 
of  more  destructible  natural  products,  like  domestic  ani- 
mals and  grain.  Says  Babelon:  2 

"The  choice  of  the  standard  merchandise  varied  ac- 
cording to  the  places  and  manner  of  living  and  was  dic- 
tated only  by  considerations  of  convenience  and  facility 
of  employment.  This  principle,  revealed  by  observation, 
received  a  no  less  rigid  application  in  societies  which  had 
passed  the  first  degrees  of  material  culture  and  in  whose 
midst  the  division  of  labor  had  already  led  to  the  creation 
of  different  bodies  of  trades.  As  soon  as  industry  was 
sufficiently  developed,  alongside  pastoral  and  agricultural 
life,  for  the  working  of  the  metals  to  be  known  and  for 
their  employment  in  the  making  of  utensils,  tools,  arms, 
and  ornaments,  it  was  very  quickly  remarked  what  ad- 
vantages they  offered,  whether  worked  or  not,  as  the  in- 
termediary of  transactions  and  a  convenient  merchandise 
standard." 

One  of  the  reasons  for  the  transition  from  cattle  and 
agricultural  products  to  the  metals  as  the  medium  of 
exchange  was  the  development  of  international  trade. 
Such  articles  as  oxen  and  grain,  which  passed  very  well 
in  domestic  exchanges,  were  not  easy  of  transportation 
and  were  not  always  acceptable  to  foreign  traders.  The 
metals  came  into  play  as  a  convenient  merchandise  for 
exchange  against  the  manufactures  of  Tyre,  even  before 
they  were  directly  used  as  money.  Tin,  copper,  silver, 
and  gold  were  recognized  as  of  high  value  as  soon  as  the 

'A.  de  Foville,  in  L'Econotniste  Franfats  (August  27,  1898),  p. 
277.  J  Les  Origines  de  la  Monnaie,  p.  33. 

59 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

means  of  working  them  were  discovered,  and  perhaps 
of  higher  value  at  Tyre,  where  manufacturing  processes 
were  well  advanced,  than  among  the  pastoral  tribes  of 
the  Greek  peninsula.  The  indestructible  character  of 
the  metals,  their  capacity  of  being  divided  into  any  de- 
sired fractions  without  impairing  their  value,  their  ease 
of  transportation,  and  their  manifold  uses  in  a  partially 
developed  and  military  society,  might  naturally  have 
suggested  their  employment  as  a  medium  of  exchange. 
They  worked  up  readily  into  knives,  spears,  rings,  cook- 
ing utensils  and  jewels,  which  were  in  themselves  objects  of 
general  desire,  without  destroying  their  value  if  converted 
back  into  bullion.  Among  the  Homeric  Greeks  kettles 
of  various  sizes  and  tripods  of  metal  were  often  used  in 
exchanges  and  as  presents.  They  were  evidently  col- 
lected as  the  symbol  of  riches,  as  cattle  and  sheep  had 
formerly  been.  The  r  wning  of  them  was  an  evidence  that 
one  had  a  great  crowd  of  clients  who  had  to  be  nourished 
at  his  table. 

In  Egypt  in  ancient  times  the  metals  were  cast  into 
crude  rings  and  bolts,  which  were  known  as  tabnou.  These 
tabnou  came  to  be  partially  marked  off  in  advance  into 
regular  lengths,  so  that  they  could  be  broken  off  to  meet 
the  varying  demands  of  exchange.  The  Egyptians  fol- 
lowed the  weight  system  in  determining  the  value  of 
their  money,  and  their  monuments  bear  many  illustra- 
tions of  the  money  -  changer  or  the  merchant  weighing 
out  the  rings  and  bolts  of  money  metal  and  cruder  pieces 
which  had  not  been  thus  marked.  The  weights  put  in  one 
side  of  the  balance  testified  to  the  evolution  of  money 
from  the  herd,  for  they  were  cast  in  the  figures  of  oxen, 
heads  of  oxen,  deer,  and  other  animals.  The  tabnou 
weighed  from  ninety  to  ninety -eight  grams  and  was  the 
standard  for  most  Egyptian  transactions.  The  great 
inscription  of  the  Temple  of  Karnak  recounts  that 
Thothmes  III.  received  from  the  Chetas  of  Syria  301 
of  silver  in  eight  rings,  every  ring  weighing  about 
60 


THE  EVOLUTION  OF  METALLIC  MONEY 

3612  grams  and  worth  thirty -seven  or  thirty -eight  tab- 
nou.1 

"The  merchant  weighs  and  measures  the  grain,"  was 
a  well-known  Assyrian  text,  which  indicated  that  weight 
was  the  standard  by  which  the  value  of  money  was  de- 
termined in  Assyria.  The  Bible  is  full  of  expressions 
showing  that  money  passed  by  weight.  The  shekel  itself 
was  originally  a  measure  of  weight.2  When  Abraham 
purchased  a  tomb  for  Machpelah,  he  "weighed  to  Ephron  " 
400  shekels  of  silver,  "  current  money  with  the  merchant." 3 
This  was  a  recognition  both  of  the  weight  and  fineness  of 
the  metal.  Large  amounts,  expressed  in  gold  and  silver 
talents  and  sometimes  in  talents  of  lead,  copper,  and  iron, 
were  in  heavy  bricks.  Metals  cast  into  jewels  were  often 
delivered  by  weight  in  money  payments,  as  Rebecca  re- 
ceived a  ring  of  gold  of  the  weight  of  half  a  shekel  and 
two  bracelets  of  the  weight  of  ten  shekels.  The  rings  of 
gold  given  to  Job  by  his  friends  were  the  sort  of  rings  in 
use  as  money.4  Often  the  precious  metals  circulated  in 
the  form  of  dust  or  powder  kept  in  purses.  There  were 
public  officials  in  Egypt  and  among  the  Hebrews  special- 
ly charged  with  testing  the  accuracy  of  the  scales  in  which 
money  was  weighed.5  The  Greeks  and  Romans  had  pub- 
lic weighers,  those  of  Rome  being  called  libripendentes. 

1  Lenormant,  La  Monnaie  dans  VAntiquit£,  I.,  p.  103. 

2  "And  thy  meat  which  thou  shalt  eat  shall  be  by  weight,  twenty 
shekels  a  day." — Ezekiel,  iv.,  10.  3  Genesis,  xxiii.,  16. 

4  Ridgeway  denies  that  "ring  money"  was  ''a  true  currency, 
circulating  like  the  stamped  money  of  later  times."     He  says 
that  "the  truer  view  seems  to  be  that  these  rings,  whether  em- 
ployed by  the  ancient  Egyptians  or  the  prehistoric  inhabitants 
of  Mycenae,  the  Kelts  or  Teutons,  were  nothing  more  than  orna- 
ments and  passed  in  the  ordinary  way  of  barter,  having  a  recog- 
nized distinct  relation  to  other  forms  of  property,  such  as  cattle 
and  slaves." — Tfte  Origin  of  Metallic  Currency  and  Weight  Stand- 
ards, p.  35.     But  the  researches  of  Lenormant  and  Babelon  seem 
to  show  that  such  rings  were  used  as  a  medium  of  exchange  and 
especially  marked  for  the  purpose;  vide  Babelon,  p.  52,  et  seq. 

5  Babelon,  p.  66. 

61 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

Long  after  the  use  of  coined  money  had  become  general 
in  the  Greek  world,  bars  of  iron  were  still  employed  at 
Sparta  by  authority  of  tradition  and  the  laws  of  Lycur- 
gus.  This  money  remained  in  circulation  until  the  Medic 
wars  (about  450  B.C.).  Among  the  fables  circulated  in 
regard  to  it  was  the  statement  that  it  was  rendered  brit- 
tle and  unfit  for  any  other  use  by  heating  red-hot  in  the 
fire  and  dipping  in  vinegar.  The  pieces  were  heavy  bars 
of  the  weight  of  a  mina  of  JEgina.1  In  Rome  also  heavy 
bars  of  bronze  were  used  as  money  alongside  of  the  more 
precious  metals.  When  Epaminondas  died  at  Thebes 
he  was  so  poor  that  there  was  found  in  his  house  nothing 
but  an  old  bar  of  iron.  Coined  money  had  long  super- 
seded such  a  medium  of  exchange  at  Thebes,  and  this 
could  only  have  been  a  souvenir  of  the  early  days  of 
Greece.  It  was  not  unusual  to  hang  up  in  the  temples 
these  relics  of  the  early  times.  Pheidon,  king  of  Argos, 
who  was  credited  with  the  invention  of  money,  withdrew 
from  circulation  the  old  bars  of  iron  and  consecrated  a 
certain  number  as  a  votive  offering  in  the  sanctuary  of 
Here  at  Argos.  In  the  time  of  Aristotle  these  ancient 
relics  might  still  be  seen,  clothed  with  a  religious  char- 
acter, like  the  bars  which  King  Periclytus  deposited  in 
the  Temple  of  Delphi  after  the  establishment  of  coined 
silver  money  in  Tenedos. 

The  Chinese  in  the  early  years  of  the  nineteenth  century 
used  gold  and  silver  only  by  weight.  It  was  never  coined, 
but  passed  as  merchandise,  whose  weight  and  fineness 
must  be  tested  at  each  exchange.  Even  to  the  present 
time  in  China  there  is  no  legal  money  except  that  of 


1  It  is  not  to  be  inferred  that  gold  and  silver  were  unknown  in 
Sparta  or  that  they  were  not  highly  esteemed.  The  historians  tell 
of  generals  and  chiefs  bought  with  gold  and  citizens  who  were 
'  famous  for  their  riches  of  gold  and  silver,  and  even  certain  fines 
were  fixed  in  gold  and  silver;  but  the  metals  passed  by  weight,  and 
bars  of  iron  were  the  legal  money  of  domestic  circulation.  Vide 
Theureau,  p.  19. 

62 


THE    EVOLUTION    OF    METALLIC    MONEY 

copper  alloyed  with  tin.  The  bankers  put  their  personal 
mark  upon  bullion  issued  by  them  or  passing  through 
their  hands.  Says  Babelon:  * 

"Sometimes  this  individual  imprint,  a  simple  indica- 
tion of  origin  or  place  of  production,  inspires  sufficient 
confidence  to  dispense  with  the  verification  by  touch- 
stone of  the  character  of  the  alloy.  The  facility  with 
which  the  public  and  the  merchants  accept  the  bullion 
which  comes  from  a  particular  banking  or  commercial 
house  depends  upon  the  honorable  fame  of  the  house,  but 
no  one  is  obliged  to  extend  such  confidence.  Public 
authority  never  intervenes,  either  to  force  an  individual 
to  accept  any  particular  bullion  or  to  guarantee  the 
weight  or  alloy." 

Only  gradually,  as  we  shall  see  when  discussing  the 
subject  ot  coinage,  did  the  function  of  coining  money  be- 
come essentially  a  prerogative  of  the  state.  If  it  has 
been  found  wise  to  delegate  to  the  state  the  power  of 
stamping  money,  it  is  for  the  same  reason  that  other 
powers  have  been  delegated  which  might  have  been  left 
open  for  the  individual  members  of  the  community — the 
advantages  of  uniformity  and  public  convenience.  The 
power  of  stamping  money,  therefore,  is  no  essentially 
royal  or  official  prerogative,  and  confers  no  more  right  to 
affix  a  false  stamp  or  to  attempt  to  create  money  out  of 
things  without  value  than  the  power  delegated  to  the 
state  to  regulate  measures  of  weight  and  bulk  confers 
the  right  to  fasten  the  name  of  pound  upon  the  ounce  or 
the  title  of  quart  upon  the  pint.  The  essential  feature  of 
the  evolution,  which  in  comparatively  modern  times  has 
transferred  to  the  state  exclusive  control  of  coinage,  is  the 
subdivision  of  labor — the  delegation  to  a  public  officer  of 
the  function  of  weighing  and  testing  money  which,  under 

1  Les  Origines  de  la  Monnaie,  p.  40.  Lenormant  suggests  that 
the  necessity  for  a  conventional  coin  is  greater  for  small  amounts 
than  for  large,  which  can  well  be  settled  by  weighing  gold  and 
silver. — Monnaies  et  Medailles,  p.  13. 

63 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

the  systems  of  payments  in  bullion  and  even  of  private 
coinage,  had  to  be  performed  by  each  person  for  himself. 
In  the  successive  steps  of  the  evolution  of  money  thus 
far  traversed,  the  essential  fact  stands  out  that  the  article 
sought  as  a  medium  of  exchange  was  also  a  thing  of  value 
in  itself.  The  article  may  be  suitable  for  food  or  the  proc- 
esses of  production,  or  only  for  ornament,  but  it  has  al- 
most always  been  a  thing  which  men  sought  for  indepen- 
dently of  its  monetary  use.  It  has  been,  in  the  words  of 
Babelon,  "a  real  equivalent,"  and  justifies  his  conclusion 
that  "metallic  money,  the  ordinary  instrument  of  ex- 
changes, is  of  value  only  for  the  quantity  of  precious 
metal  which  it  contains."  1 

We  now  stand  at  the  threshold  of  the  use  of  coined 
metal,  bearing  the  official  certification  of  its  weight  and 
fineness  by  the  stamp  of  an  authority  known  and  trusted 
by  all.  The  extension  of  commercial  relations  and  the 
uncertainty  and  frauds  which  attended  the  delivery  of 
the  precious  metals  by  weight  and  bearing  private  marks 
led  to  the  desire  for  a  medium  bearing  its  own  certificate 
of  weight,  fineness,  and  value  which  could  be  passed  freely 
from  hand  to  hand.  Then  came  what  Lenormant  has 
described  as  "that  fertile  innovation,  true  invention  of 
genius,  which  transformed  this  cash  equivalent,  still  so 
imperfect,  into  money."  2  But  it  has  already  been  seen 
that  the  creation  of  money  was  an  evolution,  not  a  sud- 
den inspiration.  The  state  was  appealed  to,  as  in  many 
cases  in  the  modern  world,  to  perform  a  function  capable 
of  being  performed  after  a  fashion  by  individuals,  but  best 
performed  in  a  manner  to  insure  uniformity,  security,  and 
convenience  to  all  members  of  the  community. 

The  honor  of  the  invention  of  money  was  claimed  in 
ancient  times  for  the  Lydians  and  for  Pheidon  of  Argos.8 

1  Les  Origines  de  la  Monnaie,  p.  137. 
*  Monnaie  s  et  Me  dailies,  p.  13. 

s  There  were  other  Greek  claimants,  among  them  being  the  peo- 
ple of  Naxos,  Kyme,  Phokeia,  and  Miletos.  —  Babelon,  p.  186. 

64 


THE  EVOLUTION  OF  METALLIC  MONEY 

The  development  of  money  coined  by  the  state  from  the 
use  of  metals  by  weight  and  by  private  coinage  is  gen- 
erally set  in  the  seventh  century  B.C.  The  claims  of  the 
Lydians  and  of  Pheidon  of  Argos  were  so  well  sustained, 
even  within  a  few  centuries  of  that  time,  that  the  lexicog- 
rapher Pollux,  who  drew  his  data  from  the  best  sources, 
including  many  authors  who  are  now  lost,  and  used  it  in 
a  careful  manner,  declared  that  it  was  very  difficult  to 
settle  the  question  to  whom  belonged  the  real  credit. 
The  difficulty  of  the  problem  has  not  diminished  with  the 
lapse  of  more  than  twenty  centuries,  but  some  additional 
light  has  been  thrown  upon  it  by  comparisons  of  coins 
and  ancient  monuments.  Lenormant  reaches  the  con- 
clusion that  the  stamping  of  money  took  place  indepen- 
dently in  both  countries,  but  that  in  Lydia  it  was  gold 
money,  and  in  ^Egina,  where  Pheidon  was  supposed  to 
have  executed  the  first  coinage,  it  was  silver  money.1 
The  money  of  ^gina  was  in  the  shape  of  a  turtle,  the 
pieces  weighing  a  little  less  than  twelve  grams,  and  dif- 
fered from  the  oval  bars  of  bullion  previously  used  only 
by  some  rough  stamping.  The  Lydian  money  was  of  a 
similar  shape,  but  less  elongated,  and  was  made  in  part 
of  electrum. 

A  fact  which  leads  Lenormant  to  conclude  that  the 
Lydian  money  has  slightly  the  advantage  in  antiquity 
is  that  the  pieces  fulfil  less  completely  than  the  coins  of 

Del  Mar  endeavors  to  carry  the  origin  of  money  much  further 
back  than  the  seventh  century,  but  he  does  not  appear  to  dis- 
tinguish between  official  coined  money  and  its  cruder  forerunners. 
— History  of  Monetary  Systems,  p.  38,  et  seq. 

1  La  Monnaie  dans  I'AntiquiU,  I.,  p.  126.  Professor  Hill,  of  the 
Department  of  Coins  and  Medals  of  the  British  Museum,  declares 
that  "the  bulk  of  the  evidence,  both  literary  and  numismatic, 
goes  to  show  merely  that  the  earliest  silver  coinage  was  the 
^Eginetic,  but  that  the  ^ginetic  coinage  was  at  the  same  time 
only  an  adaptation  of  something  which  already  existed  on  the 
other  side  of  the  ^gean  Sea." — A  Handbook  of  Greek  and  Roman 
Coins,  p.  6. 

I--5  6$ 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 


the  conditions  which  go  to  make  money.  Indeed, 
to  the  unskilled  observer  the  roughly  marked  and  ir- 
regularly formed  coins  thus  singled  out  to  denote  the 
birth  of  money  present  no  striking  difference  from  the 
pieces  of  bullion  bearing  private  marks  which  had  pre- 
ceded them  and  some  of  the  slightly  improved  pieces 
which  followed  them.  The  distinctive  step  in  monetary 
science  which  they  denote  is  the  stamp  of  the  state  rather 
than  the  individual,  giving  a  certain  assurance  of  the  uni- 
formity and  purity  of  the  metal.  The  stamps  were  sunk 
deeply  into  the  metal,  instead  of  standing  out  upon  its 
surface,  and  were  simply  the  forms  of  animals  and  not 
the  distinctive  wording  which  is  found  on  modern  coins. 
"The  invention  of  the  matrix,  giving  a  type  in  relief," 
says  Lenormant,  "constituted  a  capital  step  which  yet 
remained  to  be  accomplished  and  which  would  constitute 
a  new  period  in  the  history  of  money."  l  The  coins  of 
^Egina,  although  irregular  in  form,  conformed  to  this 
new  condition  of  progress,  and  this  is  one  of  the  reasons 
why  he  throws  the  weight  of  his  opinion  in  favor  of  the 
greater  antiquity  of  the  Lydian  coins  of  electrum  bearing 
the  sunken  stamp. 

Money  having  thus  been  born,  even  in  its  primitive 
form  its  convenience  caused  its  rapid  introduction  into 
all  the  countries  coming  in  touch  with  Asia  Minor  or  the 
Greek  islands,  and  from  them  into  countries  still  farther 
removed.  From  Lydia  the  use  of  money  spread  among 
the  Greek  cities  which  dotted  the  west  coast  of  Asia 
Minor,  and  from  there  crossed  the  sea  to  the  coasts  of 
Thrace  and  Macedonia.  ^Egina  was  in  the  seventh  cen- 
tury the  emporium  of  Greek  commerce,  where  the  ships 
of  the  Orient  and  of  the  Greek  islands  met  in  a  sort  of 
international  market.2  It  was  a  part  of  the  logic  of 
events  that  the  use  of  money  should  have  its  birth  there, 
and  that  from  JEgina,  it  should  traverse  all  parts  of  the 

1  Monnaies  et  Mcdailles,  p.  21.  l  Babelon,  p.  212. 

66 


THE  EVOLUTION  OP  METALLIC  MONEY 

Greek  peninsula.  Its  propagation  was  so  rapid  that  by 
the  middle  of  the  sixth  century  B.C.  there  was  not  a  coun- 
try where  the  Greeks  were  established  in  which  money  was 
not  used. 

When  the  Persians  pursued  their  conquering  march 
over  Asia,  they  learned  from  the  Lydians  the  use  of 
money  and  began  the  coinage  of  the  gold  daric,  one  of 
the  most  beautiful  of  the  early  coins.  The  use  of  money 
spread  more  slowly  in  the  interior  provinces  of  the  new 
Persian  empire,  and  the  precious  metals  still  circulated 
by  weight,  as  in  the  days  of  the  ascendency  of  Nineveh 
and  Babylon.  Money  proved  especially  convenient  for 
carrying  on  the  great  military  enterprises  of  the  Achae- 
menid  kings,  and  the  product  of  the  royal  mints  was 
poured  out  in  gold  for  the  army  and  in  silver  for  the  fleet. 
The  use  of  coined  money  did  not  become  general  in 
Phoenicia  until  the  times  of  the  Medic  wars  (492  -  449 
B.C.),  and  was  introduced  into  Egypt  by  the  Greek  and 
Phoenician  merchants  of  Memphis  and  Naucratis.  It 
was  not  till  the  time  of  Alexander  that  the  use  of  money 
became  common  in  Egypt.1  There  was  a  natural  eco- 
nomic reason  for  this  in  the  fact  that  the  organization  of 
industry  was  based  upon  slavery.  This  precluded  money 
payments  for  wages  and  the  establishment  of  "money 
economy"  among  the  masses. 

The  Greek  traders  and  colonists  who  peopled  southern 
Italy  introduced  the  use  of  money  at  an  early  date  into 
the  peninsula,  and  imitations  of  Greek  coins  were  made 
by  the  Etruscans.  The  Roman  legends  claimed  an  in- 
dependent invention  of  money  by  one  of  their  early  kings. 
The  aes  signatum,  of  bronze  or  copper,  stamped  at  first 
with  simple  lines,  was  ascribed  to  Numa  or  Servius  Tullius, 
and  was  perhaps  of  independent  origin,  but  government 
coinage  of  gold  or  silver  money  was  probably  introduced 
from  Greece  or  her  imitators  in  Sicily  or  Etruria.2  It 

1  Noel,  Histoire  du  Commerce  du  Monde,  1.,  p.  95. 

1  Babelon  declares  that  the  role  of  Servius  Tullius  was  to  put 

6? 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

was  not  until  the  century  following  the  combat  between 
the  Etruscan  and  the  Syracusan  fleet  under  Hiero  the 
First  (about  475  B.C.)  that  a  well -ordered  coinage  of 
gold  and  silver,  accompanied  by  the  use  of  the  as  as 
subsidiary  money,  was  adopted  in  Etruria.  This  system, 
in  its  turn,  had  an  influence  upon  the  monetary  art  of 
the  Greeks  of  Cumae  and  Sicily.1  Greek  colonies  carried 
the  use  of  money  to  the  Euxine,  and  in  later  times  in  the 
valley  of  the  Danube  there  were  quantities  of  early  Greek 
money,  consisting  largely  of  pieces  coined  under  Philip 
and  Alexander  of  Macedon.  Massalia  (now  Marseilles) 
was  the  medium  for  the  introduction  of  coined  money 
into  Gaul,  and  through  the  Greek  colonies  in  the  north 
of  Spain  it  spread  among  the  more  civilized  tribes  of  that 
peninsula.2  The  Carthaginians  were  slow  in  adopting  the 
use  of  coined  money,  which  they  finally  took  from  Sicily 
rather  than  from  their  mother-country  of  Phoenicia.  The 
first  Carthaginian  coins  were  struck  in  Sicily  after  Sicilian 
models  to  serve  for  military  purposes  in  the  island,  but  in 
course  of  time  the  use  of  money  spread  to  the  parent  city 
on  the  African  coast. 

The  conquests  of  Alexander  carried  the  use  of  money 
beyond  the  Persian  Gulf  and  into  India.  There  are  no 
traces  of  coined  money  in  these  countries  before  his  time, 
and  the  money  afterwards  coined  bears  indisputable 

the  currency  and  weight  system  upon  a  definitive  legal  basis. — 
Les  Origines  de  la  Monnaie,  p.  191.  It  was  about  450  B.C.  that 
the  Decemvirs,  in  the  Twelve  Tables,  fixed  contributions  in  metal- 
lic money. 

1  Lenormant,  Monnaies  el  Midailles,  p.  24. 

:  Ridgeway  supports  the  view  that  the  Gauls  learned  of  gold 
money  through  the  Greek  colonies,  and  refutes  the  rather  surpris- 
ing contention  of  Schrader  (Prehistoric  Antiquities  of  the  Aryan 
Peoples,  p.  255)  that  their  first  knowledge  of  it  was  obtained  at 
the  time  of  the  sacking  of  Rome  in  390  B.C.  The  Gauls,  on  the 
contrary,  had  already  obtained  so  definite  a  knowledge  of  the 
use  and  value  of  gold  that  Brennus  stipulated  that  the  ransom 
of  Rome  should  be  paid  in  gold. — The  Origin  of  Metallic  Currency 
and  Weight  Standards,  p.  6a. 

68 


THE  EVOLUTION  OP  METALLIC  MONEY 

marks  of  Hellenic  origin.  The  monarchies  which  were 
set  up  upon  the  ruins  of  the  empire  of  Alexander  carried 
the  use  of  money  into  Arabia  and  Parthia.  In  the  third 
century  B.C.  the  use  of  money  was  already  universal 
among  the  civilized  nations,  and  followed  the  Roman 
eagles  in  the  conquest  and  civilization  of  distant  parts 
of  Gaul,  Germany,  Britain,  and  Dalmatia.  Silver  was  the 
standard  at  Rome  until  near  the  dawn  of  the  empire, 
and  such  gold  coinage  as  occurred  under  Roman  author- 
ity was  executed  by  Sulla  in  88  B.C.  and  Pompey  in  81 
B.C.  It  remained  for  Caesar  to  unify  the  coinage  as  well 
as  the  political  policy  of  the  empire  by  the  adoption  of 
gold  as  the  standard  and  by  an  immense  output  of  new 
coins.1  Augustus  would  not  even  leave  to  the  state  such 
a  prerogative,  but  in  the  year  16  B.C.  reserved  to  himself 
the  coinage  of  gold  and  silver,  and  left  to  the  senate  and 
the  generals  only  the  modest  profits  upon  the  minor 
coins. 

1  Mommsen,  History  of  Rome,  IV.,  p.  660. 


THE    QUALITIES   OF   MONEY 

Good  money  should  have  intrinsic  value — Meaning  of  exchange 
value  —  Importance  of  stability  of  value  —  The  qualities  of 
homogeneity  and  indestructibility — Necessity  that  the  money 
material  should  be  capable  of  subdivision  and  combination 
without  impairing  the  value  of  the  parts — Adaptability  of  the 
metals  for  coinage — Special  properties  of  gold  and  silver  which 
qualify  them  for  the  monetary  function — Their  defects  for  the 
purpose. 

HAVING  studied  the  functions  of  money  and  the  slow 
evolution  of  metallic  money  from  among  articles 
less  exchangeable,  it  remains  to  consider  the  qualities 
which  have  made  gold  and  silver  the  most  acceptable 
materials  of  money,  and  which,  therefore,  may  be  con- 
cluded to  conform  in  some  degree  to  the  requirements  of 
an  ideal  money  substance.  Gold  and  silver  have  for 
nearly  twenty -five  centuries  performed  among  civilized 
peoples  the  functions  of  the  medium  of  exchange  and 
standard  of  value,  and  various  fractions  of  them,  deter- 
mined according  to  the  history  and  traditions  of  each 
nation,  have  served  as  the  common  denominator  of 
transactions.  From  this  experience  have  been  deduced 
these  essential  qualities  of  money,  possessed  by  the  pre- 
cious metals: 

(1)  Value  in  exchange. 

(2)  Stability  of  value. 

(3)  Homogeneity  of  material. 

(4)  Durability. 

(5)  Divisibility  without  diminution  of  value. 

70 


THE    QUALITIES    OF    MONEY 

(6)  Large  value  in  small  compass. 

(7)  Adaptability  to  coinage. 

I.  Value  in  exchange  is  the  primary  quality  of  money. 
Money  should  be  a  merchandise  capable  of  exchange 
without  loss  for  every  other  merchandise.  "The  ex- 
perience of  centuries  as  well  as  reasoning,"  says  Leroy- 
Beaulieu,  "has  demonstrated  that  money  is  a  merchan- 
dise which  is  worth  only  the  quantity  of  the  precious 
metal  which  it  contains."  *  It  is  sometimes  contended 
that  money  is  only  the  sign  and  symbol  of  value  and  does 
not  contain  value  in  itself.  Value,  in  strict  scientific  rea- 
soning, is  a  relationship  rather  than  an  inherent  quality, 
The  term  intrinsic  value  is  a  misnomer  in  a  sense,  but 
there  is  hardly  any  substitute  term  which  expresses 
equally  well  the  value  in  exchange  of  articles  which  are 
highly  prized.  Gold  and  silver  have  intrinsic  value  in 
this  sense  —  that  they  have  become  in  the  course  of  forty 
centuries  the  most  highly  prized  and  eagerly  sought  arti- 
cles within  human  knowledge.2  It  is  conceivable  in 
theory  that  they  might  lose  some  of  their  value  if  they 
were  no  longer  employed  for  monetary  use,  but  by  the 
same  process  of  reasoning  wheat  would  lose  its  value  if 
it  were  no  longer  employed  for  food.  The  peculiar  char- 
acteristic of  the  precious  metals,  and  more  particularly 
of  gold  in  advanced  societies,  is  that  they  have  not  been 
adopted  as  money  arbitrarily  by  a  single  people  or  a  few 
peoples,  but  that  their  inherent  responsiveness  to  all  the 
conditions  of  a  medium  of  exchange,  a  standard  of  value, 
and  a  store  of  value  have  made  them  the  chosen  medium 


d'  Economic  Politique,  III.,  p.  127. 

*  Roscher  declares  that  as  people  advance  in  civilization  they 
at  each  step  choose  a  more  and  more  costly  object  as  the  medium 
of  exchange.  "Commodities  which  barbarians  can  consume  im- 
mediately are  objects  of  the  first  necessity,  whereas  more  civilized 
people,  who  are  in  a  condition  to  undergo  greater  expense,  look 
more  to  the  technic  qualities  of  money,  such  as  divisibility,  ca- 
pacity for  transportation,  and  durability."  —  Principles  of  Political 
Economy,  I.,  p.  251. 

71 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

and  standard  of  every  civilized  community.1  Their  selec- 
tion by  municipal  law  has  been  only  the  tardy  recognition 
of  the  process  of  natural  selection.  As  this  fact  is  set 
forth  by  Robinson : 2 

"This  is  the  natural  and  historical  evolution  of  moneys 
— through  commercial  selection  a  thing  is  adopted  as  the 
common  medium  of  exchange,  and  then,  necessarily,  as 
the  common  measure  of  value,  in  which  function  it  quick- 
ly acquires  the  sanction  of  custom  and  thereby  of  law. 
The  essential  particulars  that  it  is  itself  of  intrinsic  value, 
or  that  it  has  the  property  it  measures  and  by  virtue  of 
which  things  are  mutually  exchangeable,  with  or  without 
an  intermediary,  and  that  it  is  adopted  in  and  through 
their  interchange,  are  true  of  every  form  of  money  that 
any  society  has  ever  employed." 

Money  does  not  derive  its  value  wholly  from  its  use  as 
a  medium  of  exchange,  even  though  that  use  rests  upon 
the  test  of  twenty-five  centuries  of  human  experience. 
Gold  and  silver  were  valued  even  in  primitive  times  be- 
cause they  possessed  value  as  merchandise  and  conformed 
to  the  other  requirements  of  money.  In  India  at  the 
present  day  silver  serves  at  once  as  an  object  of  orna- 
ment and  of  exchange.  It  was  the  practice,  down  to  the 
suspension  of  the  free  coinage  of  silver  by  the  British 
government  in  1893,  for  the  Hindoos,  when  afflicted  by 
famine  or  poverty,  to  take  their  ornaments  to  the  mint 
for  conversion  into  silver  rupees.  When  the  crisis  was 
passed  and  coin  flowed  again  into  their  hands,  it  could  be 
converted  without  loss  back  into  ornaments.  Silver  has 

1 "  It  is  true  that  the  monetary  use  of  the  precious  metals  is  the 
principal  cause  of  their  value;  it  is  an  error  to  think  that  the  legis- 
lator can  regulate  this  use  at  his  pleasure.  We  employ  things 
because  of  their  utility,  or,  more  precisely,  according  to  our  opin- 
ion of  their  utility.  It  is  in  this  respect  with  the  precious  metals 
as  with  other  commodities.  If  gold  and  silver  have  general  pur- 
chasing power,  it  is  not  because  the  legislator  has  prescribed  it, 
but  because  every  one  desires  to  possess  them." — Arnaune",  p.  21. 

2  Coin,  Currency,  and  Commerce,  p.  21. 

72 


THE    QUALITIES    OF    MONEY 

sometimes  been  preferred  to  gold  among  savage  peoples 
because  of  its  greater  bulk  and  effectiveness  in  ornamenta- 
tion. Both  silver  and  gold,  however,  since  the  beginning 
of  the  working  of  the  metals,  have  been  capable  of  con- 
version to  so  many  uses  in  the  arts  that  they  have  derived 
from  this  fact  alone  a  high  value  in  exchange.1 

II.  The  precious  metals  derive  the  high  quality  of 
stability  of  value  through  successive  centuries  from  two 
qualities — the  difficulty  of  making  large  annual  additions 
to  the  supply  and  their  indestructibility.  Changes  in  the 
purchasing  power  of  a  given  weight  of  silver  or  gold  have 
occurred,  but  no  other  substance  has  yet  been  found 
which  meets  so  well  the  demand  for  stability  of  value. 

It  is  one  of  the  important  conditions  of  a  sound  mone- 
tary standard  that  it  shall  not  be  subjected  to  violent 
fluctuations  in  the  supply  of  the  standard  metal.  If  gold 
could  be  produced  by  a  cheap  chemical  process,  or  if  it 
were  dug  out  of  the  earth  in  many  hundreds  of  millions 
in  some  years  and  in  only  tens  of  millions  in  others,  it 
would  cause  changes  in  the  supply  which  might  affect  its 
value  in  exchange.  The  value  of  metallic  money  in  ex- 
change does  not  necessarily  vary  in  exact  proportion  with 
the  supply,  but  it  is  essential  that  the  article  employed 
should  be  precious,  difficult  to  obtain,  and  should  cost 
for  production  nearly  as  much  as  its  value  in  exchange. 
Gold  conforms  pre-eminently  to  these  conditions.  There 
have  been  fluctuations  in  the  supply,  but  they  have  not 
been  radical  enough  to  seriously  affect  its  value  except 
upon  two  occasions — the  opening  of  the  American  mines 
in  the  sixteenth  century  and  the  output  of  California  after 

1  Jevons  points  out,  as  bearing  upon  the  contention  that  the 
precious  metals  owe  their  value  chiefly  to  their  use  as  money, 
that  they  "are  endowed  with  such  singularly  useful  properties 
that,  if  we  could  only  get  them  in  sufficient  abundance,  they  would 
supplant  all  other  metals  in  the  manufacture  of  household  uten- 
sils, ornaments,  fittings  of  all  kinds,  and  an  infinite  multitude  of 
small  articles." — Money  and  tlte  Mechanism  of  Exchange,  p.  34. 

73 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

1849.  The  fluctuations  which  then  occurred  in  the  ex- 
change value  of  gold  were  due  to  the  relative  smallness 
of  the  stock  which  was  then  in  existence.  Later  years 
have  brought  much  larger  supplies  into  the  market  with- 
out affecting  in  any  such  material  degree  the  exchange 
value  of  the  metal,  because  the  new  supplies  have  borne 
a  smaller  proportion  to  the  accumulated  stock. 

III.  Silver  and  gold  both  conform  fully  to  the  require- 
ment that  their  material  shall  be  so  homogeneous  that  a 
given  weight  of  either  is  equal  to  another  given  weight  in 
value.     There  is  some  difference  in  the  coloring  of  gold, 
that  of  some  mines  being  light  in  shade  and  that  of  others 
of  a  reddish  or  orange  tint,  but  this  difference  does  not 
affect  the  value  of  the  metal.     An  ounce  of  pure  gold 
from  the  mines  of  California  is  of  equal  value  in  exchange 
with  an  ounce  of  equal  purity  from  Australia,  South  Africa, 
or  the  Ural  Mountains.     There  are  only  a  few  commodi- 
ties which  conform  to  this  condition.     Wheat  has  to  be 
classified  by  qualities  in  order  to  permit  its  sale  upon  the 
exchanges  without  the  separate  examination  of  each  car- 
load.    There  is  more  homogeneity  of  quality  in  two  bars 
of  iron  or  two  bars  of  copper,  but  they  are  not  always  of 
equal  value.     This  uniformity  of  value  is  of  great  con- 
venience and  high  importance  in  the  material  used  for 
money.     Differences  in  the  qualities  of  gold  and  silver 
would  remit  society  to  many  of  the  inconveniences  of 
barter,  because  of  the  necessity  of  placing  a  different  ex- 
change value  upon  the  coins  of  different  countries  even 
where  there  was  identity  in  the  weight  and  purity  of  the 
metal. 

IV.  The  durability  of  the  precious  metals,  without  de- 
terioration, is  a  quality  of  high  importance  for  their  mone- 
tary use.     The  precious  metals  do  not  evaporate  like 
alcohol,  mould  like  wheat,  or  putrefy  like  the  flesh  of  fish 
or  cattle.     Tin,  which  was  occasionally  used  as  money 
in  antiquity,  corrodes  so  rapidly  that  this  fact  accounts 
for  the  finding  of  very  few  specimens  in  the  refuse  heaps 

74 


THE    QUALITIES    OF    MONEY 

of  ancient  cities.  Iron,  the  money  of  Sparta,  also  yields 
in  the  course  of  time  to  rust,  and  copper  is  susceptible  of 
oxidization.  Silver  loses  a  little  of  its  brilliance  of  color- 
ing by  long  exposure,  but  does  not  lose  its  intrinsic  weight 
and  value.  Gold  changes  hardly  at  all  by  mere  exposure 
to  the  air.  Both  metals  wear  slightly  by  handling  in  long 
use,  but  only  a  fraction  of  one  per  cent,  a  year  even  when 
passing  constantly  from  hand  to  hand.  This  wear,  or 
abrasion  as  it  is  called,  is  so  slight  that  it  affects  the  value 
of  a  coin  only  after  many  years,  and  can  be  determined 
in  advance  with  almost  mathematical  precision  by  those 
in  charge  of  the  mintage. 

This  quality  of  durability  without  deterioration  is  of 
importance  where  the  precious  metals  are  hoarded  as  a 
store  of  value.  The  quality  is  of  equal  importance,  how- 
ever, in  giving  them  value  in  exchange  and  in  permitting 
their  conversion  from  money  to  industrial  uses  and  back 
again  into  money.  An  article  which  was  constantly  de- 
teriorating could  not  be  converted  at  its  old  value  from 
money  into  objects  of  use  and  art,  nor  back  again  from 
those  objects  into  money.  It  would  lose  in  a  large  meas- 
ure its  general  acceptability.  Durability  and  capacity 
for  preservation  are  accompanied,  in  the  case  of  metals, 
with  the  condition  that  preservation  does  not  involve 
expense  for  maintenance.  The  importance  of  this  quality 
is  illustrated  by  the  anecdote  cited  by  Jevons  and  other 
writers,  where  the  Parisian  singer,  Mile.  Ze"lie,  making  a 
tour  of  the  Society  Islands,  was  paid  in  pigs,  cocks,  turkeys, 
and  fruit,  and,  having  no  immediate  use  for  all  the  fowls, 
had  to  employ  the  fruit  in  keeping  them  alive.1 

V.  The  quality  of  divisibility  fits  the  precious  metals 
peculiarly  for  use  as  money.  Ten  pieces  of  gold  contain- 
ing one-tenth  of  the  weight  of  a  gold  eagle  are  worth  exact- 
ly as  much  as  an  eagle.  The  division  of  gold  into  the  most 
minute  quantities  or  its  accumulation  in  the  greatest  bulk 

1  Money  and  the  Mechanism  of  Exchange,  p.  i. 
75 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

do  not  change  the  value  of  each  particle.  This  is  not  a 
quality  common  to  most  commodities.  Many  articles,  like 
building-timber,  granite,  and  even  coal,  depend  largely 
upon  the  size  of  the  pieces  for  their  value.  This  is  pre- 
eminently the  case  in  respect  to  diamonds,  which  are 
occasionally  cited  as  an  important  store  of  value.  A  dia- 
mond of  ten  carats  is  worth  many  times  the  value  of  ten 
diamonds  of  one  carat,  and  a  diamond  of  thirty  carats  is 
worth  much  more  than  three  diamonds  of  ten  carats. 
Gold  and  silver  are  subject  to  no  such  limitations  in  their 
qualification  for  use  as  money.  Silver  is  capable  of 
division  into  fractions  sufficiently  minute  to  equal  the 
value  of  the  labor  of  a  few  minutes,  while  gold  in  small 
compass  has  sufficient  value  to  equal  the  labor  of  weeks 
or  months. 

VI.  The  element  of  large  value  in  small  compass  is  an 
important  one  in  modern  exchange,  because  it  contributes 
to  the  easy  transfer  of  money  from  place  to  place.  It  is 
this  fact  which  gives  money  a  substantially  uniform 
value  in  all  parts  of  the  world  at  the  same  time.1  The 
cost  of  conveying  gold  or  silver  from  London  to  Paris, 
including  insurance,  is  stated  by  Jevons  at  about  four- 
tenths  of  one  per  cent.,  and  between  the  most  distant 
parts  of  the  commercial  world  it  does  not  exceed  two  or 
three  per  cent.  It  is  necessary  that  the  material  of 
money  should  be  neither  too  minute  nor  too  bulky.  Gold 
cannot  be  divided  conveniently  into  fractions  small 
enough  for  small  change,  and  there  are  metals  of  which  a 
pin-head  in  amount  would  represent  the  price  of  a  day's 
labor.  Cases  of  money  too  bulky  for  modern  use  are 
thus  defined  by  Jevons: 2 

1  "Transportation  of  values  supposes  an  equality  of  the  value 
of  the  money  in  two  places,  while  the  transportation  of  goods 
supposes  different  values  of  the  same  kind  of  goods  in  both  places." 
— Knies,  Geld  und  Credit,  I.,  p.  218. 

2  Money  and  the  Mechanism  of  Exchange,  p.  35.     Even  silver 
has  been  subjected  to  criticism  because  of  its  bulk,  and  Laveleye 

76 


"There  was  a  tradition  in  Greece  that  Lycurgus  obliged 
the  Lacedaemonians  to  use  iron  money,  in  order  that  its 
weight  might  deter  them  from  overmuch  trading.  How- 
ever this  may  be,  it  is  certain  that  iron  money  could  not 
be  used  in  cash  payments  at  the  present  day,  since  a 
penny  would  weigh  about  a  pound,  and  instead  of  a  five- 
pound  note,  we  should  have  to  deliver  a  ton  of  iron.  Dur- 
ing the  last  century  copper  was  actually  used  as  the  chief 
medium  of  exchange  in  Sweden;  and  merchants  had  to 
take  a  wheelbarrow  with  them  when  they  went  to  receive 
payments  in  copper  dalers." 

VII.  Adaptability  to  coinage  and  to  use  as  money  is 
one  of  the  qualities  which  gold  and  silver  possess  in  an 
eminent  degree.  They  offer,  in  the  language  of  a  French 
author,  "At  once  sufficient  malleability  and  hardness  to 
receive  and  permanently  retain  the  imprint  of  a  monetary 
type,  which  cannot  be  worn  except  by  incessant  and  pro- 
longed handling  nor  be  cut  in  pieces  without  a  serious 
effort.  Of  all  the  metals  they  are  those  most  easy  to 
recognize  at  the  first  effort,  by  sight,  by  sound,  by  weight, 
or  by  chemical  tests."  1  Some  of  the  mechanical  advan- 
tages of  gold  and  silver  are  set  forth  by  Bolles: 2 

"All  impurities  can  be  readily  removed  and  a  uniform 
quality  obtained.  They  can  be  readily  tempered  or 
hardened  by  the  mixture  of  a  small  quantity  of  copper, 
and  thus  endowed  with  better  wearing  power.  Their 
composition  also  admits  of  stamping,  or  of  marking  de- 
nominations, without  much  cost.  If  the  metals  were  too 
hard,  this  could  not  be  done;  if  they  were  too  soft,  then 
a  double  defect  would  attend  their  circulation:  their  names 
would  wear  off  and  they  might  lose  their  identity :  and  they 
would  fall  below  legal  weight  and  lose  their  legal  existence." 

declared  that  in  Belgium  in  1891  the  declining  proportion  of  gold 
money  was  indicated  by  "the  great  sacks  of  crowns  which  begin 
to  reappear  upon  the  backs  of  bank  messengers." — La  Monnaie 
et  le  Bimetallisme  Internationale,  p.  115. 

1  Babelon,  p.  241.         *  Money,  Banking,  and  Finance,  p.  xa. 

77 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

Other  metals  have  been  tried  as  the  material  for  coin- 
age, but  have  not  proved  so  workable,  except  for  sub- 
sidiary coins,  as  gold  and  silver.  Platinum  was  tried  by 
the  Russian  government  in  1828.  It  is  a  metal  of  an  ex- 
tremely high  melting-point,  oxidizes  slowly,  and  its  white 
color  and  high  specific  gravity  easily  distinguish  it  from 
other  metals.  The  Russian  government  was  the  owner 
of  the  principal  platinum-mines  in  the  Ural  Mountains, 
and  had  pieces  struck  of  the  face  value  of  three,  six, 
and  twelve  rubles.  Several  objections  to  the  use  of  the 
metal  soon  disclosed  themselves.  Platinum  is  not  largely 
used  in  commerce,  and  there  is  no  large  stock  on  hand  to 
steady  the  value  of  the  portion  used  as  money.  The  cost 
of  making  the  coins  was  found  to  be  great,  owing  to  the 
difficulty  of  melting.  The  Russian  government  aban- 
doned the  experiment  in  1845  an&  withdrew  the  coins 
from  circulation.  Improvements  in  the  manner  of  work- 
ing platinum  were  afterwards  made,  and  it  was  proposed 
by  Jacobi  at  the  monetary  conference  held  in  Paris  in 
1867  that  the  metal  be  adopted  as  the  material  for  five- 
franc  pieces.  The  suggestion  was  not  adopted,  and  is  not 
likely  to  be,  for  it  runs  counter  to  the  commercial  ex- 
perience of  the  world  in  seeking  a  standard  of  value.1 
Some  of  the  advantages  of  gold  as  money  are  thus  summed 
up  by  Walker: 3 

"The  fusibility,  ductility  and  malleability  of  gold  form 
a  group  of  properties  of  the  highest  importance,  as  we 
shall  have  occasion  farther  to  note  when  we  come  to 
speak  of  coinage,  while  they  add  vastly  to  its  uses  in  the 
arts  industrial  and  decorative.  One  cubic  inch  of  gold, 

1  Jacobi  declared  that  platinum  was  found  in  considerable 
quantities  in  various  parts  of  South  America  and  that  it  was 
predestined  by  nature  to  become  the  universal  metal  for  money 
when  it  should  be  found  in  sufficient  abundance. — Appendix  to 
Report  of  International  Conference  of  1878,  p.  855.  It  is  said  by 
Cauwes  that  platinum  has  the  important^defect  that  old  metal 
is  worth  much  less  than  new. — Cours  d'Economie  Politique,  II., 
p.  157.  »  Money,  p.  41. 

78 


THE    QUALITIES    OF    MONEY 

Mr.  Seyd  tells  us,  may  be  drawn  out  to  cover  fourteen 
millions  of  square  inches.  Gold  may  be  refined  and  al- 
loyed, united  and  divided,  with  absolutely  no  loss  of  the 
pure  metal  in  the  repeated  process." 

Notwithstanding  these  varied  merits  of  the  precious 
metals,  they  fall  short,  like  most  human  instruments,  of 
ideal  perfection  as  the  material  of  money.  They  lack  in 
some  respects  that  degree  of  cognizability  at  sight  which 
would  afford  complete  protection  against  counterfeiting;1 
tr-ey  show  with  time  the  effects  of  wear;  and  they  have 
not  always  conformed  to  that  steadiness  of  value  in  re- 
lation to  other  things  which  is  the  dream  of  monetary 
theorists.  Nevertheless,  their  unanimous  selection  by  civ- 
ilized peoples  in  historic  times  as  the  material  for  money 
and  as  the  standard  of  value  justifies  the  conclusion  that 
they  conform  on  the  whole  to  the  varied  demands  made 
under  widely  diverse  conditions  better  than  any  other 
substance  or  combination  of  substances  which  has  come 
within  the  realm  of  human  knowledge. 

1  Sykes  says,  "  None  of  our  money  possesses  this  attribute  in  per- 
fection, and  the  counterfeit  coiner  still  carries  on  his  lucrative,  if 
risky,  profession,  but  it  is  not  easy  to  turn  out  a  counterfeit  gold 
coin  which  will  defy  a  close  examination." — Banking  and  Cur- 
rency, p.  8. 


VI 

PRODUCTION   OF   THE    PRECIOUS   METALS 

Bearing  of  the  statistics  of  production  on  economic  problems — 
Early  history  of  gold  and  silver  mining — Origin  of  the  fable  of 
the  golden  fleece — Mines  of  Greece,  Thrace,  Egypt,  and  Spain — 
Decline  of  mining  during  the  Middle  Ages — Eagerness  of  Co- 
lumbus and  his  successors  to  find  gold  and  silver — Ultimate 
success  in  Mexico  and  Peru — The  modern  discoveries  in  Cali- 
fornia, Australia,  and  South  Africa — Changes  in  ratio  of  pro- 
duction of  the  metals. 

THE  amount  of  production  of  the  precious  metals 
from  year  to  year  and  decade  to  decade  has  always 
been  a  factor  in  their  value  and  distribution.  The  eco- 
nomic bearings  of  the  records  of  this  production,  aside  from 
their  purely  historical  interest,  involve  the  subjects  of  the 
quantity  of  the  precious  metals  now  existing  in  the  world ; 
their  influence  upon  prices,  contracts,  and  general  well- 
being;  the  portion  left  for  use  as  money  after  the  deduc- 
tion from  the  annual  product  of  the  amount  used  in  the 
arts;  and  the  changes  in  the  relation  between  gold  and 
silver  caused  by  changes  in  the  supply  and  in  the  relative 
demand  for  one  or  the  other  metal.1 

Many  investigations  have  been  made  to  ascertain  the 
course  of  production,  and  where  correct  figures  have  been 

'What  Walker  declared  in  1877  is  still  true,  "The  monetary 
questions  which  now  agitate  many  of  the  nations  of  the  world, 
not  sparing  America,  Asia,  or  Australia,  convulsing  some  with 
the  severest  throes  of  felt  or  apprehended  financial  distress,  have 
reference  primarily  to  the  facts,  the  startling  facts,  of  the  present 
yield  of  the  precious  metals." — Money,  p.  99. 

80 


PRODUCTION    OF    THE    PRECIOUS    METALS 

lacking  estimates  have  been  made  based  upon  premises 
more  or  less  plausible.  The  broad  facts  disclosed  by 
such  investigations  regarding  the  fluctuations  in  the  stock 
of  the  precious  metals  in  the  world  in  use  as  money  are 
that  the  amount  was  very  small  prior  to  the  discovery 
of  America  in  1492;  that  the  stock,  especially  of  silver, 
was  materially  increased  by  the  production  of  the  mines 
of  Mexico  and  Spanish  America  during  the  sixteenth  and 
seventeenth  centuries;  but  that  the  sum  of  this  pro- 
duction, while  it  met  to  a  certain  extent  the  demand  for 
metallic  money  under  the  limited  economic  conditions 
of  that  time,  was  but  a  trifle  in  comparison  with  the  large 
fund  of  gold  placed  at  the  command  of  the  world  after 
the  discovery  of  the  mines  of  California  and  Australia 
about  1850;  that  this  large  production  of  gold  slackened 
somewhat  after  1875,  while  the  production  of  silver  in- 
creased, but  that  there  was  another  great  revival  in  the 
production  of  gold  after  the  opening  of  the  mines  of  South 
Africa  and  the  Klondike  about  1890. 

The  production  of  the  precious  metals  prior  to  1492  is 
the  subject  of  many  detached  notices  in  the  writings  of 
antiquity  and  the  Middle  Ages,  but  does  not  lend  itself 
to  very  precise  calculations.  The  most  painstaking  effort 
to  bring  together  the  material  on  the  subject  and  to  form 
some  estimate  of  the  production  of  early  times  and  the 
stock  remaining  in  use  as  money  was  made  by  Jacob,  an 
English  writer,  early  in  the  nineteenth  century. 

His  researches,  as  well  as  the  notorious  facts  of  ancient 
history,  show  that  gold  and  silver  were  found  in  nearly 
every  country  soon  after  the  people  acquired  the  art  of 
working  metals.  Owing,  however,  to  imperfect  methods, 
only  the  richest  ores  and  those  on  the  surface  were  reached, 
and  the  supply  of  these  was  soon  exhausted.  The  third 
book  of  Job  notes  the  fact  that  "surely  there  is  a  vein  for 
the  silver,  and  a  place  for  gold  where  they  fine  it."  The 

1  Job,  xxviii.,  i. 
i.-«  8 1 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

region  of  the  Caucasus,  where  the  chain  of  the  Taurus 
Mountains  divides  into  two  ranges,  was  one  of  the  most 
famous  of  the  early  gold-fields,  and  the  method  of  obtain- 
ing the  gold  is  supposed  to  have  given  rise  to  the  fable  of 
the  golden  fleece.  The  primitive  source  of  gold  was  the 
sands  of  the  rivers,  from  which  the  gold  was  filtered  by  its 
greater  specific  gravity.  In  the  Caucasus,  as  in  Mexico 
even  at  the  present  time,  a  lamb's  fleece  was  placed  in  the 
bed  of  the  stream,  whose  heavy  wool  caught  and  retained 
the  falling  fragments  of  the  yellow  metal,  creating  a  genu- 
ine fleece  of  gold  well  worth  the  cupidity  of  Jason  and  his 
fellow-Argonauts.1 

These  mines  of  the  Caucasus  were  not  far  from  those 
of  the  Ural  Mountains,  where  Russian  travellers  in  the 
eighteenth  century  discovered  remains  of  the  mining  op- 
erations of  the  ancients.  Nubia  was  one  of  the  most  fa- 
mous of  the  mining  countries  of  Africa,  and  contributed 
much  to  the  wealth  of  the  Pharaohs.  According  to  an 
ancient  writer,  these  mines  were  not  far  from  the  ancient 
Berenike  Panchrysos,  in  latitude  twenty  -  two  degrees 
north.  Their  operation  was  interrupted  by  the  invasion 
of  the  Ethiopians,  who  overran  Egypt  between  800  and 
700  B.C.,  and  afterwards  by  the  Medes  and  Persians.  In 
the  passages  of  the  mines  have  been  found  many  tools  of 
brass  and  masses  of  bones  of  people  who  had  been  buried 
in  the  ruins.2  Some  of  the  mines  in  this  vicinity  were 
worked  as  late  as  the  fourteenth  or  fifteenth  century. 

The  extension  of  the  arts  of  mining  from  Egypt  and 
the  civilized  countries  of  Asia  to  the  nearest  European 
countries  about  fifteen  centuries  before  Christ  led  to  the 
opening  of  the  mines  of  Greece.  The  island  of  Cyprus 
yielded  gold,  silver,  and  copper,  and  continued  to  be  work- 
ed until  the  times  of  the  Romans.  In  Crete  and  Thasos 
mines  of  gold  were  opened  by  the  Phoenicians.  The  rich 
silver-mines  of  Laurium  were  famous  in  Athenian  history, 

1  Ilauser,  p.  36.  'Jacob,  I.,  p.  43. 

82 


PRODUCTION    OF    THE    PRECIOUS    METALS 

and  with  the  extension  of  Greek  civilization  were  supple- 
mented by  the  opening  of  mines  of  gold  in  Thessaly  and 
of  silver  in  Epirus.  The  product  of  these  mines  became 
available  about  the  time  of  the  Persian  wars  and  add- 
ed to  the  growing  wealth  of  Athens  and  the  ability  of 
the  allied  states  to  contribute  to  the  store  of  precious 
metals  piled  up  in  the  temple  of  Delphi  as  commutation 
for  the  protection  rendered  by  the  Athenian  navy  against 
the  Persians.  In  Asia  Minor  the  rich  gold-dust  contained 
in  the  river  Pactolus  running  by  Sard  is  gave  rise  to  the 
fable  of  Midas,  who  by  washing  in  the  river  acquired  the 
power  of  converting  whatever  he  touched  into  gold.  The 
mines  of  Italy,  which  were  worked  by  the  Etruscans,  had 
their  period  of  richness  and  were  followed  by  the  mines 
of  the  Alps  and  the  rich  silver -mines  of  Spain.  One  of  the 
Spanish  veins  is  said  to  have  supplied  Hannibal  with  300 
pounds  weight  of  silver  daily.1 

The  methods  of  mining  at  this  time  were  comparatively 
crude,  but  new  supplies  of  the  precious  metals  seem  to 
have  been  discovered,  especially  in  the  mountain  ranges 
and  the  sand  of  river-beds  flowing  from  the  mountains, 
as  civilization  from  time  to  time  extended  its  sway  and 
proper  tools  of  copper  and  iron  became  available.  The 
result  of  this  mining  activity  was  to  accumulate  great 
stores  of  the  precious  metals,  which  were  all  the  more 
imposing  from  the  fact  that  they  were  less  apt  to  be  used 
as  an  actual  medium  of  exchange  than  as  hoards  for  the 
purpose  of  illustrating  the  wealth  and  power  of  monarchs 
and  rich  individuals  and  as  a  treasure  for  emergencies. 
Thus,  we  read  of  Solomon  that  he  "made  a  great  throne 
of  ivory  and  overlaid  it  with  the  best  gold  " ;  that  all  the 
drinking  vessels  were  of  gold;  that  "all  the  vessels  of  the 
house  of  the  forest  of  Lebanon  were  of  pure  gold;  none 
were  of  silver;  it  was  nothing  accounted  of  in  the  days  of 
Solomon."  2  Many  passages  are  collected  by  Jacob  to 

1  Jacob,  I.,  p.  99.  2  I.  Kings,  ch.  x.,  v.  18-21. 

83 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

show  that  the  amount  of  money  paid  as  tributes  to  Darius 
and  other  rulers  represented  immense  sums,  but  it  is  by 
no  means  clear  that  they  were  necessarily  represented  in 
bulk  by  coined  money,  since  banking  methods  were  well 
understood  in  the  ancient  world  and  taxes  and  transfers 
of  capital  were  undoubtedly  made,  at  least  in  part,  by 
letters  of  credit  rather  than  in  coin.1  There  is  no  doubt, 
however,  that  very  large  sums  in  metal  were  accumulated 
by  the  early  Roman  emperors.  They  indicate  the  exist- 
ence of  a  considerable  volume  of  'the  precious  metals  at 
that  time. 

One  of  the  peculiar  circumstances  which  affected  the 
relations  of  society  to  the  precious  metals  in  ancient  times 
was  that  these  relations  did  not  conform  to  modern  eco- 
nomic principles.  This  was  true  of  the  methods  of  min- 
ing themselves,  which  were  based  upon  the  slave  system, 
and  also  of  the  use  of  the  metals  as  money.  While  they 
were  employed  as  money  in  one  form  or  another  in  the 
commercial  centres  and  by  trading  peoples,  the  stock  was 
scanty  and  was  very  slightly  diffused  in  agricultural  com- 
munities and  among  the  masses.  The  proportion  of  gold 
and  silver  which  might  have  been  heaped  up  by  Darius, 
Pericles,  or  Augustus  in  their  treasuries  or  temples  repre- 
sented a  larger  ratio  of  the  total  stock  of  the  metals  than 
any  such  accumulations  of  to-day,  even  the  large  stocks 
in  the  reserves  of  the  Bank  of  France,  the  Imperial  Bank 
of  Russia,  or  the  Treasury  of  the  United  States,  and  they 
only  rarely  performed,  like  these  modern  accumulations, 
the  functions  of  money  in  general  use  through  their  paper 
representatives.  As  Walker  truly  says:2 

1  Thus,  Augustus  is  said  to  have  received  by  the  testamentary 
dispositions  of  his  friends  about  $155,000,000;  but  it  came  at  dif- 
ferent times  and  undoubtedly  in  different  forms.     Tiberius  left 
at  his  death  about  $100,000,000,  but  this  was  not  necessarily  en- 
tirely in  metal.     Vide  Jacob,  I.,  p.  26. 

2  Money,  p.   108.     It  is  significant  of  the  limited  diffusion  of 
gold  and  silver  among  even  the  well-to-do  that  in  the  ruins  of 
Pompeii  ''among  the  utensils  none  have  been  found  either  of  gold 

84 


PRODUCTION    OF    THE    PRECIOUS    METALS 

"Gold  and  silver  were  regarded  as  an  end,  not  as  a 
means;  as  treasure,  not  money.  They  were  distributed 
not  by  trade,  but  by  war.  It  was  the  hand  of  the  con- 
queror that  stripped  them  from  palaces  and  temples.  If 
they  were  taken  from  the  store  of  the  monarch,  it  was 
not  to  freight  the  caravans  of  commerce,  but  to  fill  the 
chariots  and  mule-carts,  to  lade  the  sumpter-horses  or 
the  camel- trains  of  a  victorious  army." 

Mining  under  the  Roman  Empire  gradually  fell  under 
state  control,  which  nearly  always  stifles  improvements 
by  removing  the  stimulus  of  self-interest.  A  horde  of 
officials  was  appointed,  but  operations  fell  into  the  hands 
of  men  destitute  of  theoretical  knowledge,  who  blindly 
followed  the  methods  of  their  predecessors  and  made  no 
new  experiments.1  The  slave  labor  employed  was  un- 
skilled and  ceased  to  be  available  with  the  collapse  of 
great  fortunes  and  the  social  and  economic  disorders  at- 
tendant on  the  break-up  of  the  empire.  When  the  bar- 
barians poured  across  the  frontiers,  the  mines  of  Illyria, 
Dalmatia,  and  Thrace  were  the  first  to  suffer.  These  cir- 
cumstances, with  the  steady  decline  in  the  arts  and 
sciences  after  the  time  of  the  Antonines,  led  to  the  almost 
complete  abandonment  of  mining  during  the  Middle  Ages 
and  the  gradual  disappearance  of  the  stocks  of  the  pre- 
cious metals  which  had  been  inherited  from  antiquity. 
Jacob  undertakes  to  calculate  mathematically  the  prob- 
able stock  of  the  metals  in  the  time  of  Augustus  and  the 
percentage  of  loss  by  abrasion  during  succeeding  cen- 
turies,2 but  such  estimates  are  purely  conjectural,  and  the 
only  indisputable  fact  is  the  great  scarcity  of  gold  and 

or  silver;  but  those  for  which  in  our  day  silver  is  almost  exclusive- 
ly adopted  by  the  middle  class  of  persons,  are  composed  of  iron 
or  brass." — Jacob,  I.,  p.  210. 

'Jacob,  I.,  p.  177.  Slaves  themselves  became  difficult  to  pro- 
cure and  too  expensive  for  the  heavy  work  of  mining,  during  the 
period  of  peace  which  prevailed  under  Augustus  and  his  successors- 

2  The  Precious  Metals,  I.,  pp.  225-237. 

8; 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

silver  at  the  time  of  the  discovery  of  America.  Here  and 
there,  in  Hungary,  Saxony  and  Spain,  mining  was  car- 
ried on,  but  with  only  modest  results. 

When  Columbus  and  the  explorers  who  followed  him 
set  out  on  their  quest  for  undiscovered  countries,  it  was 
largely  with  the  hope  of  finding  gold  and  silver.  Gold 
was  found  at  the  outset  in  Hispaniola,  the  first  island  ac- 
quired by  Columbus  for  Spain,  but  even  with  the  forced 
labor  of  the  natives  it  was  obtained  in  only  limited  quan- 
tities.1 The  quest  for  gold,  at  first  disappointed,  was 
more  amply  rewarded  after  the  conquest  of  Mexico  by 
Cortez,  about  1520,  and  of  Peru  by  Pizarro,  about  1532. 
The  treasures  which  had  been  accumulated  by  many  years 
of  mining  by  the  simple  but  partly  civilized  peoples  of 
these  countries  were  poured  into  Europe  and  were  the 
subject  of  most  fabulous  estimates  as  to  their  amounts. 
Thus,  the  ransom  of  the  Inca  of  Peru  extorted  by  Pizarro 
— a  sum  equal  to  about  $4,000,000  gold  of  our  money,  and 
an  additional  sum  in  silver2 — was  a  large  amount  to  be 
distributed  among  a  small  body  of  adventurers,  but  did 
not  add  greatly  to  the  monetary  resources  of  the  world. 
It  was  the  discovery  of  the  rich  silver  deposits  of  the 
mountain  of  Potosi,  in  Peru,  about  1545,  which  revealed 
the  New  World  as  an  important  producer  of  the  precious 
metals  and  especially  of  silver.  Up  to  this  date  (1493- 
1545)  the  production  of  gold  preponderated  in  the  pro- 
portion of  about  $220,000,000  to  $144,000,000  in  silver; 
but  from  that  discovery,  followed  by  many  others,  began 
what  Leroy-Beaulieu  designates  as  "the  first  age  of 
silver."  3  It  was  an  age  which  lasted  for  nearly  three 
centuries,  terminating  about  1840,  and  which  brought 
into  the  commercial  world  nearly  $6,000,000,000  of  silver 
against  less  than  half  as  much  gold. 

In  the  next  two  generations  these  conditions  were  re- 

1  Patterson,  The  New  Golden  Age,  I.,  p.  338. 
*  Prescott,  Conquest  o}  Peru,  bk.  iii.,  ch.  vii. 
1  Traite"  d' Economic  Polilique,  111.,  p.  240. 
8.6. 


PRODUCTION    OF    THE    PRECIOUS    METALS 

versed.  While  the  production  of  silver  was  so  increased 
that  the  aggregate  for  the  sixty -two  years  from  1841  to 
1902  was  almost  exactly  equal  to  the  entire  product  of 
the  three  and  a  half  centuries  which  had  gone  before,  the 
increase  in  the  production  of  gold  was  in  still  greater  pro- 
portion and  carried  the  product  of  sixty-two  years  to  an 
aggregate  nearly  three  times  as  great  as  that  of  the  pre- 
ceding three  and  a  half  centuries.  Already,  about  1823, 
the  mines  of  the  Ural  Mountains  began  to  be  more  pro- 
ductive, and  about  1830  auriferous  sands  were  discovered 
in  Siberia  which  by  1840  were  yielding  a  considerable 
product.1  These  sources  of  production  afforded  but  a 
drop  in  the  bucket,  however,  to  those  revealed  by  the 
discoveries  of  gold  in  California  and  Australia. 

Title  to  California  had  not  yet  passed  to  the  United 
States  by  the  treaty  with  Mexico  when  an  American 
mechanic  from  New  Jersey  named  Marshall,  in  the  em- 
ploy of  Captain  Sutter,  made  the  great  discovery.  Some 
miles  above  Sutter's  Fort,  on  the  American  fork  of  the 
Sacramento,  Marshall  was  working  with  some  other  men 
on  a  sawmill.  While  widening  the  channel  through  which 
water  was  let  on  to  run  the  mill,  yellow  particles  were 
brought  down  by  night  which  were  discovered  by  Mar- 
shall the  next  morning.  Suspecting  them  to  be  gold,  he 
started  to  take  some  of  them  to  Captain  Sutter,  reaching 
the  fort  on  the  afternoon  of  January  28,  i848.2  The  news 
rapidly  spread  in  California,  reached  Washington  in  an 
official  report  in  December,  and  within  the  next  year  at- 
tracted gold-seekers  in  every  type  of  craft  by  sea  and  in 
caravans  which  braved  every  hardship  in  finding  roads 
over  the  untracked  mountains.  Within  a  year  San  Fran- 
cisco had  sprung  into  a  prosperous  city,  and  the  next  year 
California  was  admitted  into  the  Union  by  the  Compro- 
mise of  1850. 

Gold  was  discovered  in  Australia  as  early  as  February 

1  Walker,  Money,  p.  143. 

1  Schouler,  History  of  the  United  States.  V..  p.  133. 

87 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

1  6,  1823,  at  a  spot  on  the  Fish  River  near  Bathurst,  in 
New  South  Wales.1  It  was  only  gradually,  however, 
that  its  existence  in  paying  quantities  became  known, 
and  it  required  the  stimulus  of  the  Californian  discoveries 
to  swell  to  an  army  the  rush  of  gold-seekers.  The  gov- 
ernment at  first  discouraged  mining,  but  now  reversed 
its  policy,  and  in  August,  1851,  the  precious  metal  was 
discovered  in  large  quantities  at  Ballarat  by  Mr.  Har- 
greaves.2  In  the  summer  of  1852  a  large  flow  of  immi- 
gration took  place  from  Europe  and  gold  began  to  be 
found  in  every  province.  From  the  first  discoveries  to 
the  close  of  1897  the  Australian  colonies  produced  gold 
to  the  amount  of  nearly  $2,ooo,ooo,ooo,3  and  the  next 
five  years  added  another  sum  of  $375,000,000.  In  this 
volume  of  production  Australia  ran  an  almost  even  race 
with  the  United  States. 

These  two  countries  enjoyed  unchallenged  supremacy 
until  some  time  after  the  development  of  the  mines  of 
South  Africa  about  1889.  There,  as  in  Australia,  gold 
was  known  to  exist  some  years  before  it  was  extracted 
from  the  mines  in  large  quantities.  A  flourishing  town 
equipped  with  machinery  for  mining  and  crushing  the 
quartz  ore  was  in  existence  as  early  as  1884;  but  as  late 
as  1887  Barnato,  the  South  African  promoter,  was  ad- 
vised by  two  engineers  that  the  auriferous  rock  could  not 
possibly  extend  to  any  depth.4  But  their  error  was  soon 
discovered,  the  town  of  Johannesburg  sprang  into  being 
almost  in  a  night,  and  the  gold  production  of  Africa,  prin- 
cipally from  the  Witwatersrand  (White  Waters  Range), 
reached  $10,256,100  as  early  as  1890. 

The  production  increased  rapidly  every  year,  until  in 
1896  the  product  of  Africa  surpassed  that  of  Australia, 
and  in  the  next  year  that  of  the  United  States  as  well. 


1  Coghlan,  The  Seven  Colonies  o]  Australasia.  iSqj-gS,  p.  210. 
1  Patterson,  I.,  p.   185. 

3  Coghlan,  p.  524.     His  figures  are  £399,381,186. 

4  Raymond,  B.  1.  Barnato:  a  Memoir,  p.  109. 


PRODUCTION    OF    THE    PRECIOUS    METALS 

The  war  which  broke  out  between  Great  Britain  and  the 
Boers  in  1899  closed  the  mines  for  several  years,  but  rain- 
ing activity  was  resumed  as  soon  as  machinery  could  be 
installed  after  the  peace.  The  interest  aroused  all  over 
the  world  by  the  new  gold  discoveries,  and  the  great  im- 
provements and  economies  made  in  mining  methods, 
seemed  to  operate  as  a  stimulus  to  production  in  the  old 
gold-bearing  countries  as  well  as  the  new.  The  produc- 
tion of  the  three  chief  competitors  in  gold  production 
advanced  during  the  last  decade  of  the  nineteenth  cen- 
tury in  the  following  proportions: 

RECENT    INCREASE    IN    GOLD    PRODUCTION 

YEAR  United  States           Australasia  Africa  The  world 

1890...  $32,845,000  $29,808,000  $10,256,100  $118,848,700 

1893...  35.955>o°°        35>688,6oo  28,943,500  157,287,600 

1896...  53,088,000        43,776,200  44,581,100  202,251,600 

1899...  71,053,400        79,321,600  73,023,000  307,168,800 

A  graphic  idea  of  the  production  of  gold  and  silver  at 
different  periods  since  the  discovery  of  America  is  afforded 
by  the  following  presentation  of  figures:1 

PRODUCTION    OF    GOLD    AND    SILVER    IN    THE  WORLD    SINCE 

THE    DISCOVERY    OF    AMERICA 

GOLD 

ANNUAL   AVERAGE   FOR    PERIOD  TOTAL  FOR    PERIOD 


PERIOD 

Fine  ounces 

Value 

Fine  ounces 

Value 

1493-1600. 

224,693 

$4,645,000 

24,266,820 

$501,640,000 

1601-1700. 

293,304 

6,063,000 

29.330.445 

606,315,000 

1701-1800. 

610,882 

12  ,628,000 

61,088,215 

1,262,805,000 

1801-1840. 

512,217 

10,589,000 

20,488,552 

433.535.000 

1841-1870. 

.    4.772,876 

98,664,000 

143,186,294 

2,959,924,000 

1871-1890. 

•    5.347.540 

1  10,544,000 

106,950,802 

2,210,870,000 

1891-1902. 

.  10,72  1,  606 

221,635,000 

128,659,270 

2,659,624,000 

Total 513.970,398  $10,624,713,000 

1  This  table  was  specially  prepared  for  the  author  by  Mr.  Robert 
E.  Preston,  Acting  Director  of  the  Mint.  From  1492  to  1885  is 
a  table  of  averages  for  certain  periods,  compiled  by  Soetbeer; 
for  the  years  1886  to  1902  the  production  is  the  annual  estimate 
of  the  Bureau  of  the  Mint. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

SILVER 

ANNUAL   AVERAGE    FOR    PERIOD  TOTAL   FOR    PERIOD 

PERIOD  Fine  ounces     Coining  value         Fine  ounces  Coining  value 

1493-1600  6,797,463     $8,789,000       734,125,960  $949,173,000 

1601-1700  11,970,731      15,477,0001,197,073,100  1,547,731,000 

1701-1800  18,336,720     23,708,000  1,833,672,035  2,370,809,000 

1801-1840  20,028,887      25,896,000       801,155,495  1,035,836,000 

1841-1870  31,036,378     40,128,000      931,091,326  1,203,835,000 

1871-1890  85,751,998110,872,0001,715,039,955  2,217,425,000 

1891-1902  163,028,342  210,784,000  1,956,340,100  2,529,410,000 

9,168,497,971  $i  1,854,219,000 

Analysis  of  these  figures  shows  that  the  volume  of  gold 
production  averaged  considerably  less  than  $5,000,000 
annually  from  the  discovery  of  America  to  the  close  of 
the  sixteenth  century,  and  advanced  during  the  next  cen- 
tury to  an  average  of  only  about  $6,000,000.  The  eigh- 
teenth century  showed  an  increased  volume  of  production, 
which  carried  the  annual  average  up  to  about  $12,500,000. 
This  average  persisted  during  the  first  few  years  of  the 
next  century,  but  was  then  checked  by  the  revolt  of  the 
American  colonies  of  Spain.  The  revolutions  which  fol- 
lowed at  frequent  intervals  among  the  liberated  peoples 
caused  such  disorder  that  the  mines  were  in  many  cases 
abandoned,  the  export  movement  ceased,  and  Europe, 
at  the  very  moment  when  industry  was  feeling  the  im- 
pulse of  renewed  activity  as  the  result  of  the  termination 
of  the  Napoleonic  Wars,  began  to  suffer  a  penury  of  gold.1 
In  spite  of  an  increased  product  in  the  Ural  Mountains, 
the  gold  production  of  the  first  forty  years  of  the  nine- 
teenth century  gradually  declined  and  fell  upon  the 
average  to  about  $10,600,000. 

Then  came  the  great  outburst  of  mining  activity  which 
followed  the  opening  of  the  Californian  and  Australian 

1  In  Mexico  the  Spanish  government  had  not  permitted  any 
but  Spaniards  to  work  the  mines.  After  the  revolution  the 
Mexican  government  exiled  the  Spaniards,  and  they  took  away 
considerable  amounts  of  capital.  Mining  was  thus  more  severe- 
ly handicapped  than  if  it  had  been  freely  opened  to  foreign  capi- 
talists.— Chevalier,  La  Monnaie,  p.  191. 

90 


PRODUCTION    OF    THE    PRECIOUS    METALS 

mines.  For  the  next  generation,  from  1841  to  1870,  the 
gold  product  of  the  world  was  nearly  three  thousand 
millions  of  dollars,  and  the  average  annual  product  was 
multiplied  by  more  than  ten.  This  annual  average  was 
maintained  from  1870  to  1890,  but  with  a  tendency  down- 
ward towards  the  close  of  the  period.  Then  came  the  new 
outburst  of  mining  activity  following  the  discovery  of  the 
mines  of  South  Africa  and  the  Klondike,  which  doubled 
the  annual  product  and  accumulated  within  the  space  of 
twelve  years  a  stock  nearly  as  large  as  that  produced  in 
the  generation  following  the  Californian  and  Australian 
discoveries.  Again,  in  spite  of  the  permanent  additions 
made  to  the  stock  between  1850  and  1870,  the  genera- 
tion beginning  with  1871  witnessed  a  production  of  gold 
nearly  equal  to  the  entire  product  of  the  preceding  380 
years. 

The  production  of  silver  since  the  discovery  of  America 
has  been  more  evenly  distributed  than  that  of  gold.  The 
silver  product  down  to  1840  was  almost  continuously 
larger  than  that  of  gold  and  constituted  more  than  two- 
thirds  of  the  value  of  the  combined  product  of  the  two 
metals.  The  new  gold  discoveries  radically  changed  this 
ratio.  For  the  thirty  years  ending  with  1870  the  gold 
produced  was  nearly  three-fourths  of  the  total  value  of 
the  aggregate  production  of  the  precious  metals.  To  put 
the  case  more  forcibly,  twice  as  much  silver  as  gold  was 
produced  during  the  eighteenth  century  and  the  early 
years  of  the  nineteenth,  while  during  the  thirty  years 
beginning  with  1841  three  times  as  much  gold  as  silver 
was  produced.  For  the  next  thirty  years  the  production 
of  one  metal  was  almost  exactly  the  same  as  that  of  the 
other.  These  figures  in  each  case  relate  to  value.  In 
weight  the  production  of  silver  was  near  ninety-five  per 
cent,  of  the  weight  of  both  metals  during  the  earlier  period, 
and  always  maintained  a  large  preponderance  because  of 
the  wide  diffr- ence  in  value  of  a  given  weight  of  the  two 
metals. 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

The  "Comstock  Lode,"  one  of  the  most  famous  of  the 
silver-mines,  was  also  a  large  producer  of  gold.  Although 
discovered  in  1858  by  a  Virginian  miner  named  Finney, 
the  lode  took  its  name  from  a  high-handed  and  reckless 
adventurer  named  Henry  Comstock.  It  was  gold  which 
was  first  taken  out,  and  before  mining  for  silver  was  sys- 
tematized a  serious  battle  for  control  of  the  country  had 
to  be  fought  with  the  Indians  at  Pyramid  Lake.  Then 
moved  across  the  scene  Adolph  Sutro,  with  his  finally  suc- 
cessful plan  for  a  tunnel  to  carry  off  the  waters;  William 
Sharon,  agent  of  the  Bank  of  California  and  railway  pro- 
moter; John  Mackay,  J.  G.  Fair,  James  Flood,  and  William 
O'Brien,  as  purchasers  of  the  Virginia  Consolidated  and 
discoverers  of  the  "Big  Bonanza";  then  after  1877  came 
the  falling  off  in  the  product  and  the  gradual  decline  of 
the  mine.  Up  to  1880  the  total  product  of  the  Comstock 
mines  was  computed  at  $174,000,000  in  silver  and  $132,- 
000,000  in  gold.  The  highest  yield  was  $38,000,000  in 
1876.  In  1880  the  product  had  fallen  to  $5,100,000  and 
in  1881  to  $1,000, ooo. * 

The  Comstock  Lode  was  typical  of  the  highly  specu- 
lative character  of  mining  enterprises.  Of  103  mining 
enterprises  started  up  to  1880,  only  six  proved  profitable. 
They  yielded  a  product  of  $115,900,000  for  an  expendi- 
ture of  $18,300,000.  The  other  ninety -seven  mines,  even 
in  this  rich  district,  showed  a  loss  of  $43,400,000.  While 
cost  of  production  must  in  the  long  run  influence  the 
volume  of  the  precious  metals  taken  from  the  mines,  the 
speculative  character  of  mining  has  made  this  influence 
difficult  to  trace  and  slow  in  its  operation.  It  is  probable 
that  the  total  stock  of  gold  and  silver  taken  from  the 
earth  has  been  extracted  at  a  cost  in  labor  several  times 
the  value  of  the  metal  obtained.  Where  a  few  have  ob- 
tained rich  prizes,  many  more  have  suffered  disappoint- 
ment and  ruin.  It  is  necessary  not  merely  to  obtain  the 

1  Suess,  pp.  383-385- 
92 


PRODUCTION    OF    THE    PRECIOUS    METALS 

metals,  but  to  obtain  them  in  proportions  which  com- 
pensate the  labor  expended.  They  must,  as  Hauser  ex- 
presses it,  fall  within  "the  limit  of  exploitability."  *  A 
summary  of  the  economic  results  in  the  Californian  mines, 
made  by  Dr.  Reyer,  after  the  study  of  actual  conditions, 
puts  the  case  thus:2 

"Even  though  the  dividends  in  particular  cases  are 
large,  they  by  no  means  cover  the  deficit  of  all  the  un- 
profitable undertakings.  In  fact,  the  production  of  gold 
here,  as  in  Australia,  has  always  yielded  a  net  loss.  This 
may  be  explained  as  follows.  A  few  dozen  mines  pro- 
duce the  great  mass  of  gold.  They  make  large  profits 
and  determine  the  price.  Their  success  attracts  capital 
without  end  to  similar  undertakings;  these  are  given  up 
after  a  while,  and  the  money  is  returned  to  other  really 
productive  branches  of  industry.  But  the  temptation 
from  the  fortunate  gold  producers  continues,  and  causes 
new  capital  constantly  to  rush  to  its  destruction — the 
same  phenomenon  that  is  seen  in  games  of  chance.  A 
few  win  a  great  deal;  hundreds  lose  all  they  have.  The 
business,  on  the  whole,  is  a  losing  one." 

This  view,  from  the  side  of  capital,  is  reinforced  on 
the  side  of  the  net  return  to  labor.  In  the  washings  of 
the  Rhine  in  the  early  years  of  the  nineteenth  century  a 
day's  work  yielded  from  one  and  one-half  to  two  francs 
(thirty-nine  cents).3  In  Australia,  in  the  most  productive 
period  of  early  mining,  the  ordinary  wages  of  a  laborer 
were  thirty  shillings  ($7)  and  the  minimum  was  fifteen 
shillings.  In  view  of  the  difficulty  of  bringing  European 
products  to  the  island  and  the  high  prices  which  they 
consequently  commanded,  these  sums  did  not  represent 
a  high  purchasing  power. 

That  cost  of  production  is  a  factor  in  the  output  of  the 
precious  metals,  in  spite  of  the  uneconomic  character  of 
much  of  this  production,  was  brought  out  in  a  striking 

1  L'Or,  p.  84.  *  Bimetallism  in  Europe,  p.  83. 

1  Chevalier,  Tlie  Probable  Fall  in  the  Value  of  Gold,  p.  43. 

93 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

way  by  the  Mexican  Commission  on  International  Ex- 
change. By  separating  the  production  of  silver  in  Mexico 
from  that  in  other  parts  of  the  world,  they  found  that, 
while  in  1902  there  was  a  net  increase  in  the  world's  pro- 
duction over  1893  of  about  5,500,000  ounces,  more  than 
the  entire  increase  was  from  the  mines  of  Mexico.  The 
silver  production  of  all  other  countries  fell  from  122,062,- 
527  ounces  in  1893  t°  II2.°53>667  ounces  in  1902;  the 
production  of  Mexico  increased  during  the  same  interval 
from  43,410,094  ounces  to  58,944,906  ounces.  Nor  were 
the  figures  for  these  years  exceptional.  The  tendency  of 
production  outside  of  Mexico  was  downward,  with  slight 
variations,  during  the  entire  period  of  ten  years,  while  that 
of  Mexico  was  almost  steadily  upward.  While  other 
countries,  therefore,  were  reducing  their  output  by  more 
than  eight  per  cent.,  Mexico  was  increasing  hers  by  thirty 
per  cent.  The  explanation  is  to  be  found,  at  least  in 
part,  in  the  declaration  of  the  commission  that  "this  was 
on  account  of  the  free  coinage  system,  which  for  the  pres- 
ent encourages  silver  mining;  but  in  other  countries, 
where  the  cost  of  mining  has  to  be  paid  in  gold,  the  out- 
put of  the  silver  mines  has  been  reduced."  *  In  Mexico, 
in  other  words,  the  decline  in  the  gold  price  of  silver  was 
accompanied  by  a  corresponding  decline  in  the  gold  value 
of  wages  and  prices  of  materials,  because  they  were  paid 
in  silver;  but  in  every  gold-standard  country  the  fall  in 
the  gold  value  of  silver  reduced  the  return  received  for  a 
given  number  of  ounces,  while  the  expenditures  for  wages, 
machinery,  and  materials  remained  constant  in  gold,  and 
reduced  to  a  vanishing-point  the  profits  from  the  poorer 
mines. 

1  Report  of  the  Commission  on  International  Exchange,  1903, 
p.  190. 


VII 


The  vital  question  whether  the  stock  of  gold  and  silver  is  adequate 
for  monetary  demands — Existing  stock  of  gold  money — Annual 
consumption  of  gold  in  the  arts — Amount  lost  by  abrasion — 
Amount  of  gold  and  silver  swallowed  up  in  the  East — Rapid  in- 
crease in  recent  years  of  net  gold  production  annually  available 
for  money — History  of  the  decline  in  the  gold  price  of  silver — 
Early  fears  of  inadequacy  of  the  gold  supply — Is  there  now 
danger  of  an  excessive  supply  ? 

THE  question  whether  the  world  is  to  have  enough 
metallic  money  to  meet  the  needs  of  expanding  trade 
has  always  been  a  question  of  keen  interest  to  economists 
and  financiers.  It  has  become  especially  so  during  the 
last  twenty  years,  because  these  years  have  witnessed  a 
revulsion  of  feeling,  from  the  fear  that  gold  was  becoming 
scarce  to  a  doubt  whether  it  may  not  become  so  plentiful 
as  to  contribute  to  a  serious  inflation  of  values  and  rise 
of  prices.  What  relation  the  recent  production  of  the 
metals  bears  to  the  previous  stock  and  what  part  of  the 
annual  new  stock  is  available  for  use  as  money  will,  there- 
fore, be  the  subject  of  this  chapter. 

According  to  the  figures  of  the  United  States  Mint, 
based  in  part  for  earlier  times  upon  those  of  Soetbeer,  the 
total  production  of  gold  from  the  mines  from  1493  to 
December  31,  1903,  was  529,652,914  fine  ounces,  repre- 
senting in  American  currency  a  value  of  $10,948,899,300. 
The  portion  of  this  gold  in  use  as  money,  according  to  the 
estimate  made  by  the  Mint  Bureau  in  its  report  for  1904, 
was  $5,685,700,000.  The  location  of  this  monetary  stock 
has  been  a  subject  of  dispute,  especially  in  the  United 

95 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

States,  where  much  less  gold  appears  in  active  use  than 
would  be  looked  for  in  view  of  the  amount  computed  to 
be  in  circulation  in  excess  of  bank  reserves.  It  is  prob- 
able, however,  at  least  in  regard  to  gold,  that  the  statistics 
are  fairly  accurate  and  if  they  seem  in  some  cases  to  be 
excessive  it  is  because  the  excess  is  locked  up  in  private 
hoards  or  in  small  institutions  which  do  not  make  official 
reports.  In  the  case  of  the  United  States  there  is  the 
more  reason  for  accepting  the  substantial  accuracy  of  the 
figures  of  the  Mint  Bureau,  since  the  large  stock  of  gold 
now  calculated  to  be  in  the  country  is  based  upon  statistics 
of  production  and  export  dating  back  only  to  1873  when 
the  stock  assumed  to  be  then  in  the  country  was  only 
$135,000,000. 

If  the  statistics  are  correct  of  the  stock  of  gold  now  exist- 
ing as  money,  there  remains  to  be  accounted  for  from  the 
production  of  four  centuries  a  stock  of  about  $5,300,000,- 
ooo.  The  three  directions  in  which  this  stock  has  been 
absorbed  may  be  roughly  classified  as  employment  in  the 
arts,  abrasion  of  coins  and  plate,  and  hoarding.  The 
amount  of  the  metals  employed  in  the  arts  was  largely  a 
matter  of  estimate,  until  investigations  which  were  begun 
by  Soetbeer  were  reinforced  by  official  inquiries,  beginning 
in  1878,  by  the  Bureau  of  the  Mint  of  the  United  States. 
These  calculations  led  to  the  conclusion  by  Soetbeer  that 
the  consumption  of  gold  in  the  arts  and  industries 
throughout  the  world  had  reached  in  1885  an  annual 
amount  of  about  $50,000,000.  The  estimate  of  the  Di- 
rector of  the  Mint  for  1903  put  the  world's  consumption 
in  the  arts  for  that  year  at  114,882  fine  kilograms,  repre- 
senting a  value  of  $76, 350, 600. '  Such  a  use  of  gold  has 
naturally  increased  with  growth  in  population  and  wealth 
and  with  the  large  amount  of  the  metals  which  has  re- 
cently been  added  to  the  accumulated  stock  by  the  in- 
creased annual  production.  Assuming  that  consumption 

1  Production  of  the  Precious  Metals  during  1903,  p.  40. 
96 


THE    METALS    AND    THE    MONEY    SUPPLY 

for  the  last  fifty  years  has  been  on  the  average  $50,000,000 
per  year,  the  absorption  of  gold  in  this  manner  for  the 
entire  period  would  be  about  $2,500,000,000.  A  part  of 
the  gold  thus  used  has  consisted  of  old  materials  worked 
over,  which  should  upon  some  grounds  be  deducted  from 
the  amount  of  gold  thus  absorbed,  but  this  employment 
of  old  materials  probably  no  more  than  offsets  losses  of 
gold  in  coin  and  in  articles  which  have  been  discarded 
without  preserving  the  gold.1 

The  abrasion  of  gold  coins  is  much  smaller  than  has 
generally  been  supposed.  It  is  stated  by  Soetbeer  that 
extended  investigations  in  France  and  in  Switzerland 
have  shown  that  the  average  annual  loss  through  abrasion 
on  twenty  franc  pieces  is  about  one-fifth  per  thousand ;  and 
exact  weighings  of  large  sums  of  German  double-crowns 
which  had  been  several  years  in  circulation  showed  an 
annual  loss  of  one-seventh  per  thousand.  Careful  cal- 
culations by  Jevons  put  the  loss  nearer  four-tenths  in  ten 
thousand;2  but  even  on  this  basis  Soetbeer  felt  justified 
in  the  conclusion  that  the  loss  by  abrasion  on  the  total 
monetary  stock  in  his  time,  when  this  stock  was  about 
$4,000,000,000,  was  not  more  than  700  or  800  kilograms  of 
gold  per  year,  which  would  be  about  $500,000.'  Even 
if  this  loss  were  extended  backward  over  the  past  100 
years,  it  would  represent  an  absorption  of  only  $50,- 
000,000  of  the  great  stock  of  gold  which  has  been  pro- 
duced. Abrasion  is,  therefore,  under  present  conditions 
of  production,  a  factor  which  is  almost  negligible. 

The  remaining  source  of  disappearance  of  the  gold  stock 
from  civilized  states  is  the  exportation  of  coin  and  bullion 
to  the  East.  India  has  from  remote  times  absorbed  the 

1  Lord  Aldenham  obtained  an  estimate  from  an  American 
dentist  that  the  dentists  of  the  United  States  and  Great  Britain 
used  gold  to  the  amount  of  about  $2,500,000  (,£517,000)  annually- 
— A  Colloquy  on  Currency,  p.  177. 

1  Investigations  in  Currency  and  Finance,  p.  284. 

'Bimetallism  in  Europe,  p.  125. 
i-7  97 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

precious  metals.  Pliny,  who  died  79  A.D.,  complained 
that  India  drew  from  the  Roman  Empire  not  less  than 
5,000,000  sesterces  per  year,  about  $2,500,000.  The 
excess  of  imports  of  gold  into  British  India  from  1836  to 
1904  was  nearly  $900,000,000,  and  for  the  past  twenty  years 
has  been  on  the  average  in  excess  of  $20,000,000  per  year. 

Adding  together  these  several  sums  of  gold  visible  or 
definitely  accounted  for,  we  have  a  total  of  about  $9,100,- 
000,000.  This  leaves  unaccounted  for  a  production  of 
about  $1,800,000,000.  This  is  a  considerable  deficiency, 
but  is  probably  explained  by  the  burial  and  loss  of  gold  in 
times  of  civil  disorder,  by  consumption  in  the  arts  and 
exportation  to  the  East  prior  to  the  nineteenth  century, 
and  by  unsuspected  hoards  which  still  exist  in  the  midst 
of  civilized  communities. 

The  statistics  in  regard  to  silver  are  more  difficult  to 
reconcile  than  those  of  the  more  precious  metal.  The 
total  amount  of  silver  produced  from  1493  to  December 
31,  1903,  according  to  the  report  of  the  United  States  Mint, 
was  9,333,320,341  fine  ounces,  representing  a  value  at  the 
United  States  coining  ratio  of  $12,067,323,300.  Of  this 
amount  $3,213,200,000  is  estimated  to  be  in  circulation  as 
money.  The  annual  consumption  in  the  arts  has  been 
expanding  rapidly,  partly  because  of  the  increased  wealth 
which  permits  the  moderate  investment  by  the  individual 
required  in  order  to  possess  articles  of  silver  and  partly 
because  of  the  fall  in  the  gold  value  of  the  metal,  which 
has  materially  reduced  the  cost  of  the  raw  material  of  such 
articles.  According  to  the  estimates  of  the  Mint  Bureau, 
the  amount  of  silver  employed  in  the  arts  in  the  United 
States  has  risen  from  $6,098,000  in  1880  to  $25,817,672  in 
1903.  The  average  annual  consumption  of  silver  through- 
out the  world  was  estimated  by  Soetbeer  in  1885  at  5IS.00° 
kilograms,  which  would  represent  a  value  of  about  $22,- 
000,000  at  the  old  coinage  ratio.1  The  volume  of  con- 

'  Bimetallism  in  Europe,  p.   136. 
98 


THE    METALS    AND    THE    MONEY    SUPPLY 

sumption  had  risen  by  1903,  according  to  careful  inquiries 
made  by  the  United  States  Mint,  to  1,553,204  kilograms, 
which  at  the  coining  value  would  represent  about  $63,- 
000,000. *  If  an  annual  consumption  of  $35,000,000  is 
computed  for  fifty  years,  the  amount  of  silver  thus  ab- 
sorbed stands  at  $1,750,000,000. 

Abrasion  probably  represents  a  smaller  percentage  of 
loss  in  the  case  of  silver  than  in  that  of  gold,  because  of 
the  greater  bulk  of  the  cheaper  metal.  The  exports  of 
silver  to  India  have  been  even  larger  than  the  exports  of 
gold,  having  amounted  from  1836  to  March  31,  1904,  to 
a  value  of  $i,99o,ooo,ooo.2  This  greater  absorption  of 
silver  in  India  partly  offsets  the  smaller  consumption  of 
silver  than  of  gold  in  the  arts,  but  still  leaves  a  margin  of 
nearly  $5,000,000,000  between  the  total  production  and 
the  stock  visible  or  accounted  for.  It  is  probable  that 
another  sum  of  at  least  $1,000,000,000  might  be  account- 
ed for  by  shipments  to  the  East  prior  to  1836,  for  which 
official  figures  are  not  available.3  Even  with  this  allow- 
ance there  remains  unaccounted  for  an  amount  of  more 
than  $4,000,000,000,  which  can  only  be  explained  upon 
the  disappearance  and  hoarding  of  the  metal  in  the  same 
manner  as  gold. 

Consideration  of  the  consumption  of  the  metals  in  the 
arts  and  otherwise  is  important  because  of  its  influence 
upon  the  amount  left  available  from  the  annual  produc- 
tion to  be  added  to  the  monetary  stock.  It  is  obvious 
that  if  the  consumption  in  the  arts  is  relatively  constant, 

1  Production  of  the  Precious  Metals  during  1903,  p.  40. 

1  Report  of  the  Director  of  the  Mint  on  the  Production  of  the 
Precious  Metals  during  1903,  p.  244.  The  value  of  the  silver  is 
taken  at  the  coining  rate  of  the  silver  rupee,  which  was  changed  iri 
1893.  At  the  old  rate,  the  coining  value  of  the  silver  imported 
into  India  would  be  brought  up  to  above  $2,000,000,000. 

3  Humboldt  calculated  the  flow  of  silver  to  India  and  the  rest 
of  Eastern  Asia  at  about  25,000,000  piasters  annually  at  the  close 
of  the  eighteenth  century,  but  Soetbeer  considers  this  estimate 
too  high. — Bimetallism  in  Europe,  p.  140. 

99 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  amount  available  for  addition  to  the  monetary  stock 
must  have  varied  widely  with  the  variations  in  the  amount 
produced.  So  small  was  the  annual  gold  production  during 
the  nineteenth  century,  prior  to  the  opening  of  the  Califor- 
nian  and  Australian  mines,  that  it  is  doubtful  if  the  annual 
supply  was  equal  to  the  annual  consumption  in  the  arts 
and  by  abrasion.  The  danger  of  an  inadequate  stock  was 
removed  after  1850,  only  to  reappear  under  widely  dif- 
ferent conditions  in  the  decade  ending  with  1890.  With 
an  average  annual  production  during  the  latter  period  of 
about  $105,000,000,  the  demand  for  the  arts  and  for 
export  to  the  East  absorbed  about  $60,000,000,  and  left 
available  for  use  as  money  only  about  $45,000,000  a  year. 
When,  however,  the  annual  production  of  gold  advanced 
by  leaps  and  bounds  after  1890  until  it  reached  $286,000,- 
ooo  in  1898,  and  exceeded  $300,000,000  in  1899,  even  if  an 
increase  in  consumption  for  the  arts  is  admitted  to 
$75,000,000,  the  amount  left  available  for  monetary  use 
stands  in  the  neighborhood  of  $225,000,000  per  year. 

The  stock  of  gold  available  for  monetary  uses  increased , 
therefore,  more  than  four  times  as  rapidly  with  an  annual 
production  of  $300,000,000  as  with  an  annual  production 
of  $105,000,000.  The  ten  years  ending  with  1890  added 
only  about  $450,000,000  to  the  available  monetary  stock 
of  gold,  to  be  scrambled  for  by  many  nations  which  were 
expanding  their  commerce  and  seeking  to  strengthen  the 
basis  of  their  monetary  systems.1  How  this  relative 
scarcity  of  gold  led  to  fears  of  falling  prices  of  commodi- 
ties and  a  strong  agitation  for  reopening  the  mints  of  lead- 
ing civilized  states  to  the  free  coinage  of  silver,  will  be 

1  Lord  Aldenham  put  the  consumption  from  1873  to  1893  at 
two-thirds  of  the  total  product,  leaving  only  about  $705,000,000 
(£i 45, 000,000)  available  for  monetary  uses  over  a  period  of 
twenty-one  years. — A  Colloquy  on  Currency,  p.  176.  This  esti- 
mate of  consumption  seems  rather  high,  but  the  net  balance 
available  for  money  in  civilized  countries  would  not  be  far  wrong 
if  exports  to  India  were  deducted. 

100 


THE    METALS    AND    THE    MONEY    SUPPLY 

discussed  hereafter.  It  is  intended  here  merely  to  state 
the  facts  relating  to  supply.  These  facts  show  that  the 
production  of  gold  during  the  ten  years  ending  with  1902 
was  more  than  the  production  of  the  entire  twenty  years 
preceding.  But  the  effect  of  this  production  on  the  stock 
of  gold  available  for  money  was  still  more  striking.  Where 
this  amount  had  been  perhaps  $450,000,000  for  the  ten 
years  ending  with  1892,  it  swelled  during  the  next  ten  years 
to  not  less  than  $1,500,000,000 — or  nearly  forty  per  cent, 
of  the  entire  stock  of  gold  money  in  existence  in  1893.' 

This  stock  of  new  money  found  its  way  in  large  measure 
into  bank  reserves.  The  net  increase  in  such  reserves  in 
Europe  and  in  the  national  banks  and  the  Treasury  of  the 
United  States,  from  1892  to  1902,  was  about  $950,000,000. 
This  was  an  increase  in  the  short  term  of  ten  years  of  more 
than  sixty  per  cent,  of  the  stock  of  gold  laboriously  accu- 
mulated by  these  banks  during  the  many  years  which  had 
gone  before.  Five  countries — the  United  States,  France, 
England,  Russia,  and  Austria  -  Hungary — absorbed  more 
than  three-fourths  of  the  gold  thus  added  to  bank  and 
Treasury  reserves.  The  United  States  alone  took  $456,- 
000,000,  which  was  nearly  half  the  increase,  and  a  sum 
equal  to  the  entire  stock  of  new  gold  which  became  avail- 
able for  monetary  uses  during  the  decade  ending  with 
i892.2  The  figures  in  detail  are  as  follows:  * 

1  These  figures,  although  arrived  at  in  a  different  way,  do  not 
differ  widely  from  those  of  the  increase  in  the  stock  of  gold  money 
reported  from  actual  inquiries  by  the  Director  of  the  Mint,  which 
was  $3,901,900,000  in  1893  and  $5,382,600,000  at  the  close  of 
1902. — Annual  Report,  1893,  p.  50;  Annual  Report,  1903,  p.  39. 

1  It  is  pointed  out  by  Treasurer  Roberts,  that  the  proportion  of 
gold  to  the  total  stock  of  money  in  the  United  States  increased 
from  36.52  per  cent,  on  July  i,  1897,  to  46.52  per  cent,  on  July  i, 
1902. — Finance  Report,  1902,  p.  130. 

'These  figures  for  Europe  are  deduced  from  the  returns  pub- 
lished weekly  by  U Economists  Europten.  For  the  United  States 
the  figures  are  those  of  dates  nearest  the  end  of  the  year  in  the 
reports  made  to  the  comptroller  of  the  currency — December  9, 

101 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

STOCK   OP    GOLD    IN    BANKS,    ETC. 

Dec.  31.  1802  Dec  jz.  1902 

United    States   Treasury $238,359,802  $617,196,083 

United  States  National    Banks      100,991,328  178,147,096 

European   banks 1,198,020,000  1,690,000,400 

*i.537.37i.i3°         $2,485,343,579 

The  proportion  of  the  new  silver  devoted  in  recent  years 
to  use  as  money  is  less  clearly  revealed  by  the  official 
statistics,  because  a  large  part  of  this  new  metal  has  been 
absorbed  by  the  countries  of  the  Orient,  regarding  whose 
monetary  statistics  there  is  less  definite  information  than 
for  the  Western  civilized  countries.  Somehow  or  other, 
in  spite  of  the  rapid  increase  in  the  annual  production  of 
silver  from  1873  to  1893,  and  a  steady  annual  production 
of  approximately  165,000,000  ounces  per  year  since  that 
date,  the  stock  of  silver  produced  has  been  absorbed.  After 
deducting  about  65,000,000  ounces  for  use  in  the  arts  and 
absorption  by  the  Indian  bazars,  the  amount  of  silver 
available  annually  for  monetary  uses  appears  to  be  in  the 
neighborhood  of  100,000,000  ounces.1  A  part  of  this 
amount  goes  to  the  East,  which  is  less  definitely  accounted 
for  as  money  than  the  amount  absorbed  by  the  civilized 
countries  of  the  West. 

The  most  acute  crisis  in  the  market  for  silver  was  in 
1893.  Production  rose  from  89,175,023  ounces  in  1883  to 
165,472,621  ounces  in  1893,  representing  an  increase  of 

1892,  and  November  25,  1902.  The  amounts  credited  do  not 
include  Treasury  gold  certificates,  because  this  would  involve  a 
duplication  of  the  gold  held  against  them  in  the  Treasury,  but  they 
include  gold  clearing-house  certificates. 

1  The  estimate  of  future  consumption  made  by  the  Mexican  Com- 
mission on  International  Exchange  in  1903  was:  "Coinage,  100- 
000,000  ounces;  industries,  50,000,000  ounces;  bazar  trade  in  Brit- 
ish India,  25,000,000  ounces;  total,  175,000,000  ounces." — Report 
of  the  Commission  on  International  Exchange,  1903,  p.  193.  These 
estimates  represent  largely  the  work  of  Mr.  Edward  Brush,  of  Green- 
wich, Connecticut,  technical  counsellor  of  the  Mexican  Commission, 
one  of  the  most  competent  experts  on  this  subject  in  America. 

102 


THE    METALS    AND    THE    MONEY    SUPPLY 

nearly  100  per  cent,  within  ten  years.  Just  at  this  mo- 
ment came  three  important  extraneous  influences  upon 
the  relations  of  supply  and  demand — large  sales  of  silver 
by  Germany;  suspension  of  free  coinage  of  silver  in  Brit- 
ish India;  and  suspension  of  silver  purchases  by  the 
United  States.  The  sales  of  silver  by  the  German  Em- 
pire were  made  chiefly  prior  to  1878,  but  some  of  them 
were  made  at  later  dates,  and  the  fact  that  the  German 
government  held  such  a  large  stock  of  silver  for  sale 
constituted  a  continuing  menace  to  the  market.1  It 
seemed  for  a  time  that  silver  would  no  longer  be  demanded 
in  any  considerable  quantities  for  monetary  uses.  The 
price  fell  sharply  in  June,  1893,  from  38 -|d.  to  30^.,  and 
to  an  average  of  only  2&{%d.  for  the  whole  of  1894. 

The  downward  course  of  silver  was  not  permanently 
checked  till  1903.  It  had  become  evident  that,  in  spite  of 
the  general  movement  in  favor  of  the  gold  standard,  in 
which  Mexico  and  China  finally  joined,  a  large  market  for 
silver  would  continue  to  be  found  in  providing  subsidiary 
money  for  gold-standard  countries.  It  was  declared  by 
Suess  in  1893  that  "with  the  rise  of  the  lower  classes,  with 
the  increase  of  wages  and  of  well  being,  the  demand  for  sil- 
ver and  copper  for  this  reason  must  everywhere  increase, 
even  in  gold  lands."2  The  coins  of  these  metals  circulate 
more  rapidly  than  those  of  gold,  and  will  continue  to  be  de- 
manded in  increasing  quantities.  It  was  supposed  when 
the  government  of  British  India  suspended  free  coinage 
that  the  demand  for  silver  in  India  would  cease.  For 
several  years  the  mints  were  closed  and  demand  for  the 
metal  was  limited  to  purchases  made  by  the  natives  at 
the  bazars.  It  soon  became  apparent,  however,  that  the 

'The  face  value  of  the  coins  sold  to  March  31,  1893,  was 
672, 862, 729  marks  ($160,141,329),  of  which  302,500,000  marks  was 
sold  prior  to  October  i,  1877. — Vide  Report  of  the  Berlin  Silver 
Commission,  pp.  33-36. 

2  "The  Future  of  Silver,"  in  Coinage  Laws  of  the  United  States, 

P-   393- 

103 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

growth  of  business  in  India  called  for  an  increase  in  the 
stock  of  money,  and  the  government,  influenced  by  this 
fact,  resumed  the  purchase  of  silver  bullion  for  coinage  pur- 
poses. Between  March  15,  1900,  and  April  4,  1901,  there 
were  purchased  50,297,224  ounces  at  a  cost  of  £6,002,816, 
an  average  price  of  2&%$d.  Other  large  purchases  were 
made  up  to  the  autumn  of  1904,  amounting  to  about 
57,000,000  ounces,  of  which  all  but  a  small  proportion  was 
purchased  at  prices  above  26^.  There  is  no  doubt  that 
these  purchases  contributed  to  support  the  price  of  silver 
bullion,  by  affording  an  outlet  for  a  large  part  of  the  pro- 
duction, and  that  the  regularity  with  which  such  purchases 
were  for  a  time  made  tended  to  prevent  violent  fluctua- 
tions in  the  price.1 

In  the  gold-standard  countries  of  Europe  and  America 
there  was  a  temporary  plethora  of  silver  money  as  the  re- 
sult of  permitting  it  to  be  brought  to  the  mints  for  coinage 
on  private  account  too  long  after  it  had  fallen  below  its 
legal  gold  value.  When  this  crisis  passed,  however,  and 
these  countries  had  grown  up  to  their  stock  of  silver,  a 
dearth  of  small  money  set  in.  A  convention  of  the  Latin 
Union  in  1897  authorized  an  increase  of  the  stock  of  sub* 
sidiary  silver  in  France  by  the  amount  of  130,000,000 
francs  ($25,090,000)  and  by  proportional  amounts  for 
other  countries.2  While  these  pieces  were  to  be  coined 
from  the  five-franc  pieces  on  hand,  it  became  necessary 
in  1902  for  the  members  of  the  Union  to  sanction  the 
purchase  of  new  bullion  by  Switzerland  to  the  amount  of 
12,000,000  francs  ($2,350,000)  to  meet  her  monetary 
needs.*  In  Germany  old  pieces  of  silver  are  in  process  of 
recoinage,  but  the  stock  on  hand  is  barely  sufficient  to 
meet  the  needs  of  the  circulation  under  existing  law.  It 
was  estimated  at  the  time  of  the  law  of  1900,  retiring  the 

1  Vide  letter  of  Sir  James  MacKay  of  the  Indian  government, 
Report  of  the  Commission  on  International  Exchange,  1904,  p.  497. 
*  Bulletin  de  Statistique  (January,  1898),  XLIII.,  p.  6. 
1  Ibid.  (January,  1903),  LIII.,  p.  6. 

104 


THE    METALS    AND    THE    MONEY    SUPPLY 

five-mark  gold  pieces  and  raising  the  limit  of  subsidiary 
silver  to  fifteen  marks  ($3.70)  per  capita,  that  the  stock  of 
thalers  would  be  exhausted  in  eight  or  nine  years.1  In  the 
Straits  Settlements,  French  Indo-China,  and  the  Philip- 
pines the  enactment  of  new  coinage  systems  called  for 
considerable  purchases  of  silver.  Even  in  the  United 
States  the  dearth  of  subsidiary  silver  became  a  source  of 
frequent  complaint,  and  the  secretary  of  the  Treasury 
declared  that  "in  any  event  some  provision  should  be 
made  for  an  increase  of  subsidiary  coin."2 

From  these  and  other  sources  a  demand  has  arisen  for 
silver  which  promises  to  absorb  the  annual  production  and 
maintain  the  price  near  the  level  of  about  one-half  the  old 
coinage  ratio.  How  far-reaching  is  the  demand  for  silver 
coins,  even  in  gold-standard  countries,  may  be  inferred 
from  their  statistics  of  coinage.  In  the  German  Empire, 
up  to  December  31,  1891,  the  gold  coinage  was  2,587,100,- 
ooo  marks  in  158,800,000  pieces;  the  coinage  of  silver, 
nickel,  and  copper  was  516,000,000  marks  in  1,948,000,000 
pieces.  That  is,  while  the  value  of  the  gold  coined  was 
about  five  times  that  of  the  other  metals,  the  number  of 
pieces  coined  of  the  other  metals  was  thirteen  times  as 
large  as  the  number  of  gold  pieces.3  In  the  United  States 
the  gold  coinage  from  1792  to  June  30,  1904,  was  223,- 
133,266  pieces  of  the  value  of  $2,582,474,816,  while  the 
silver  coinage  was  1,845,116,585  pieces  of  the  value  of 

$905. 37°. 444- 

The  variations  in  the  production  of  gold  and  silver  from 
time  to  time  have  caused  speculation  as  to  whether  the 
product  was  to  be  sufficient  to  meet  the  monetary  de- 
mands of  the  world.  When  the  annual  gold  supply  from 
Latin  America  fell  off  early  in  the  nineteenth  century, 
grave  fears  were  entertained  that  a  sufficient  medium  of 
exchange  to  continue  transactions  upon  the  old  basis 

1  Bulletin  de  Statistique  Quly,  1900),  XLVIII.,  p.  95. 

2  Finance  Report,  1903,  p.  46.  J  Suess,  p.  393. 

105 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

would  be  lacking.  The  avalanche  of  the  yellow  metal 
which  was  poured  from  the  Californian  and  Australian 
mines  during  the  decade  from  1850  to  1860  caused  radical 
changes  of  opinion.  While  gold  was  eagerly  accepted  in 
many  countries  where  it  displaced  silver,  yet  the  astonish- 
ing figures  of  the  annual  production  led  to  fears  in  some 
quarters  that  the  metal  would  depreciate  too  much  to  be 
a  safe  standard  of  value.  Events  showed  that  these  fears 
were  unfounded.  The  counter  suggestion,  which  began 
to  be  heard  about  1890,  after  the  general  adoption  of  the 
gold  standard  in  advanced  commercial  states,  that  gold 
was  again  becoming  scarce — was  emphatically  answered 
by  the  opening  of  the  extensive  mines  of  the  Transvaal  in 
South  Africa. 

The  large  product  obtained  from  the  mines  of  the  Trans- 
vaal has  been  chiefly  the  result  of  the  application  of  im- 
proved methods  of  mining.  When  the  presence  of  gold 
was  first  reported  there  was  a  rush  of  gold-seekers,  who 
suffered  much  loss  and  suffering  because  there  were  no 
alluvial  deposits  and  mining  the  reefs  required  capital  and 
special  skill.1  The  Transvaal  mines  would  not  have  been 
workable  at  a  profit  under  the  mining  methods  which 
prevailed  a  decade  or  two  before  their  discovery.  They 
consist  of  low-grade  quartz  reefs,  from  which  the  gold  has 
to  be  extracted  by  the  cyanide  process.  According  to  the 
older  methods  the  miner  had  to  expect  that  after  he  had 
worked  a  gold-bearing  vein  to  a  certain  depth — usually 
but  a  few  hundred  feet  below  the  surface — the  gold  would 
cease  to  be  free — that  is,  it  would  be  locked  up  in  union 
with  iron  pyrite  and  other  material,  so  that  it  would  not 
amalgamate  with  quicksilver  or  yield  to  other  methods 
which  could  be  economically  employed .  As  Shaler  declares  :2 

1  Raymond,  B.  I   Barnato:  a  Memoir,  p.  108. 

*  "The  Future  of  the  Gold  Supply,"  in  International  Monthly, 
November,  1901;  reprinted  in  Production  of  the  Precious  Metals 
during  1901,  p.  51. 

106 


THE    METALS    AND    THE    MONEY    SUPPLY 

"Thus,  in  the  mines  of  the  Witwatersrand  of  South 
Africa,  commonly  known  as  'The  Rand,'  the  deposits 
could  not  have  had  any  considerable  commercial  im- 
portance, but  for  this  method  of  winning  the  gold  from  its 
association  with  pyrite,  so  that  the  thousands  of  millions 
of  dollars  that  have  been  or  are  to  be  obtained  from  those 
deposits  are  in  large  measure  to  be  accredited  to  this  in- 
vention." 

These  improvements  in  the  art  of  mining  have  made 
available  a  large  supply  of  gold  for  many  years  to  come. 
Estimates  of  the  future  of  the  supply  of  precious  metals 
have  often  gone  astray  because  they  have  not  taken  into 
consideration  the  influence  of  improvements  in  methods 
of  extraction.  Since  these  improvements  have  been 
actually  made,  Shaler  has  estimated  that  the  yield  from 
such  a  group  of  gold  deposits  as  that  in  the  Rand  is  likely 
within  twenty  years  to  exceed  $500,000,000  per  annum 
and  to  be  maintained  at  this  or  an  even  greater  rate  for 
many  decades.1  More  important  still  are  the  alluvial 
deposits  in  old  river-beds  and  their  neighborhood,  which 
have  only  within  a  few  years  come  within  the  range  of 
paying  sources  of  supply  Under  the  method  of  ex- 
tracting the  gold  by  hand  labor  the  deposits  rich  enough 
to  afford  gold  in  paying  quantities  were  soon  exhausted, 
but  this  condition  had  been  changed  by  modern  devices 
for  dredging.  Gold  deposits  to  the  extent  of  several  thou- 
sand square  miles  are  believed  to  be  workable  by  the  new 

1  This  view  is  not  shared  by  certain  other  experts.  Thus,  it  is 
pointed  out  by  one  who  has  recently  made  an  inspection  of  the 
South  African  deposits  that  "  The  gold  is  known  to  exist,  certainly; 
but  reasons,  financial  and  technical,  prevent  a  simultaneous  pro- 
duction from  most  of  the  newer  mines  for  five  or  six  years  to  come. 
By  that  time,  just  as  all  these  newer  mines  are  reaching  the  pro- 
ducing stage,  a  number  of  the  present  largest  producers  will  be 
reaching  their  end,  and  every  year  after  that  several  of  these  big 
mines  will  drop  out." — London  Economist  (September  17,  1904). 
LXII.,  p.  1504. 

107 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

methods  and  to  be  more  accessible  than  gold  in  quartz 
reefs,  for  the  reason,  graphically  set  forth  by  Shaler,  "  that, 
while  a  mine  or  vein  has  to  be  slowly  developed  by  shafts 
and  drifts,  with  no  certainty  as  to  the  richness  of  the 
material  until  it  is  penetrated,  a  placer,  which  may 
be  likened  to  a  vein  laid  upon  its  side  with  one  of  its 
walls  removed,  can  be  promptly  explored  by  pits  or  drill 
holes,  and  at  once  attacked  at  as  many  points  as  may  seem 
desirable." l 

In  the  case  of  silver  the  methods  of  production  have 
changed  even  more  radically  than  in  the  case  of  gold. 
Mining  exclusively  for  silver  has  been  largely  abandoned. 
The  metal  has  become  a  by-product  of  lead,  copper,  and 
zinc.  While  this  has  in  a  sense  cheapened  the  cost  of  pro- 
ducing silver  and  removed  the  volume  of  production  in 
some  degree  from  the  direct  operation  of  the  principle  of 
supply  and  demand,  it  has  left  production  subject  to  the 
influence  of  the  combined  prices  of  these  several  products. 
It  has  been  estimated  that  not  more  than  one-fourth  of  the 
world's  annual  production  of  silver  is  now  derived  from 
silver-mines  worked  as  such,  and  it  was  declared  in  a  re- 
cent official  paper:  2 

"Had  it  not  been  for  other  developments  in  mineral 
production  and  metallurgical  operations  which  have  taken 
place  during  the  last  ten  years,  the  supply  of  silver  would 
long  ago  have  forced  much  higher  prices  in  order  to  supply 
the  absolute  needs  of  the  world  for  silver.  The  demand 
for  and  the  production  of  copper  has  so  enormously  in- 
creased that  from  this  source  alone  a  very  large  production 
of  silver  is  obtained.  The  largest  single  producer  of  silver 
in  the  United  States  is  a  distinctively  copper  mine.  The 
cheapening  of  metallurgical  processes  has  permitted  of  the 
working  of  ores,  particularly  those  containing  lead  and 
gold  in  small  quantities,  to  such  an  extent  that  from  this 

1  Production  of  the  Precious  Metals  during  IQOI,  p.  55. 
1  Memorandum  of  the  Mexican  Commission,  Report  of  the  Com- 
mission on  International  Exchange,  1903,  p.  180. 

1 08 


THE    METALS    AND    THE    MONEY    SUPPLY 

source  also  a  large  proportion  of  the  silver  production  of 
the  world  is  obtained." 

The  new  discoveries  of  the  precious  metals,  or  new 
methods  for  extracting  them  from  the  earth,  devised  from 
time  to  time  in  the  world's  history,  illustrate  a  general 
economic  tendency  by  which  the  inventive  genius  of 
mankind,  at  a  given  crisis  of  industry  and  production, 
finds  what  is  most  needed  to  meet  the  crisis,  because  the 
physical  and  intellectual  activities  of  many  men  are 
directed  to  finding  it.  The  new  discoveries  of  gold  have 
usually  come  at  a  time  when  the  gravest  apprehensions 
have  been  felt  regarding  the  future  of  the  metal.1  They 
have  been  found  in  countries  previously  untraversed  or 
unexplored,  upon  the  borderland  of  civilization.  There 
are  probably  still  such  sources  of  supply  in  existence  which 
might  be  opened  if  the  methods  of  obtaining  the  metal 
from  low-grade  ores  had  not  been  so  greatly  improved. 
As  the  matter  stands,  the  pressure  to  find  new  gold-fields  is 
much  diminished  by  the  large  yield  from  those  which  have 
been  discovered  and  are  proving  productive  under  new 
methods  of  extraction. 

The  question  whether  the  stock  of  gold  will  become  ex- 
cessive has  been  sometimes  debated  in  recent  years,  as  it 
was  after  the  opening  of  the  Californian  and  Australian 
mines,  but  there  is  little  reason  to  anticipate  serious  re- 
sults from  the  operation  of  such  a  cause.  If  the  metal 
becomes  so  plentiful  that  its  value  falls  materially  in  re- 
lation to  other  things,  then  the  relative  cost  of  producing 

1  Thus,  just  before  the  South  African  gold  -  fields  began  to  be 
conspicuously  productive,  the  announcement  at  the  Brussels 
Conference  of  1892,  that  British  India  would  probably  adopt  the 
gold  standard  and  the  United  States  suspend  further  purchases  of 
silver,  led  Mr.  Casasus,  one  of  the  delegates  of  Mexico,  to  declare 
that  the  struggle  of  these  countries  for  gold  "would  pump  gold 
out  of  Europe,  rendering  the  circulation  deficient;  the  stocks  of 
England  and  Russia  would  be  the  first  impaired  and  immediately 
afterward  those  of  Germany  and  France." — Le  ProbUme  Moni- 
taire,  p.  114. 

IOQ 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

gold  in  wages  and  materials  will  increase  and  the  supply 
will  decline.  Under  such  circumstances  the  principles 
will  gradually  come  into  play  which  were  applied  by 
Senior  to  the  production  of  silver  when  that  metal  was 
the  chief  product  of  mining  instead  of  a  by-product:1 

"The  question  whether  a  given  mine  shall  be  worked  or 
abandoned  must  always  be  solved  by  comparing  the 
amount  of  silver  which  it  produces  with  the  amount  of 
silver  which  must  be  expended  in  working  it.  If  it  do 
not  produce  more  silver  than  will  pay  the  wages  of  those 
who  are  directly  and  indirectly  employed  in  working  it, 
it  cannot  be  worked  profitably;  if  it  produce  less,  it  cannot 
be  worked  at  all;  if  the  difference  be  just  equal  to  the 
current  rate  of  profit  in  the  country,  it  will  just  afford  to 
be  worked ;  if  the  difference  amount  to  more,  it  will  afford 
a  rent." 

Thus  it  may  reasonably  be  assumed  that  a  large  pro- 
duction of  the  metals  beyond  the  effective  demand  of 
civilized  society  would  tend  to  correct  itself  and  obviate 
the  necessity  for  the  abandonment  of  gold  as  the  basis  of 
the  world's  monetary  systems. 

The  great  increase  in  the  stock  of  gold  in  bank  reserves 
in  recent  years  has  not  been  accompanied  by  a  corre- 
sponding increase  in  note  issues,  but  has  been  accom- 
panied by  a  great  increase  in  other  forms  of  bank 
credits.  The  production  of  the  yellow  metal  from  1890 
to  1904  was  absorbed  to  the  extent  of  sixty  per  cent,  in 
bank  reserves  and  in  the  Treasury  of  the  United  States. 
Even  if  it  is  not  desirable  that  absorption  by  these  in- 
stitutions should  continue  on  so  great  a  scale,  it  is  prob- 
able that  the  gold  available  for  monetary  uses  will  be 
taken  to  a  considerable  extent  in  the  future  by  countries 
now  upon  a  paper  basis,  especially  in  Southern  Europe 
and  Latin  America,  for  the  rehabilitation  of  their  mone- 
tary systems.  Such  an  event  would  justify  the  predi- 

1  Three  Lectures  on  the  Value  of  Money,  p.  34. 
no 


THE  METALS  AND  THE  MONEY  SUPPLY 

cation  of  Leroy-Beaulieu,  that  the  outlet  for  gold  is  for 
the  next  decade  indefinitely  extensible  and  that  this  will 
mitigate  the  influence  which  the  approaching  avalanche 
of  the  metal  might  otherwise  have  upon  prices.1  There 
must  be  reserved  for  a  future  chapter  a  discussion  of  the 
process  by  which  the  enlarged  supply  of  the  precious 
metals  after  1850  found  their  way  under  the  law  of 
marginal  utility  to  communities  which  had  the  greatest 
need  for  them,  instead  of  piling  up  indefinitely  in  those 
communities  already  well  provided  with  money — a  proc- 
ess of  distribution  likely  to  be  repeated  for  many  decades 
in  ever -widening  circles  before  the  point  is  reached  of 
complete  saturation  of  all  countries  with  metallic  money. 

1  Economiste  Francois  (October  i,  1904),  p.  475.  Early  in  1905 
the  Conversion  Bureau  (Caja  de  Conversion)  of  the  Argentine  Re- 
public had  already  accumulated  $71,109,850  in  gold  and  de- 
positors in  the  banks  had  titles  to  nearly  $22,000,000  additional. 
— London  Economist  (May  6,  1905),  LXIII.,  p.  763. 


VIII 
THE   PRINCIPLES   OF   COINAGE 

Meaning  and  origin  of  coinage — Relationship  between  coin  and 
bullion — Significance  of  free  coinage  of  the  standard  metal  — 
Does  not  necessarily  involve  gratuitous  coinage  —  Abuse  of 
seigniorage  charges  in  early  times — Influence  of  government 
control  over  quantity  of  coins  in  maintaining  their  exchange 
value — Status  of  coins  and  bullion  in  foreign  trade — Subsidiary 
coins  not  subject  to  same  rules  as  standard  coins. 

THE  gradual  adoption  of  the  precious  metals  as  the 
best  material  for  money  was  followed  by  their  con- 
version into  coins.  The  metals  in  bars  and  ingots  had  the 
advantages  of  durability  and  uniform  quality  which  are 
essential  in  money,  but  they  lacked  to  a  considerable 
degree  the  qualities  of  easy  divisibility  and  exchangeability 
which  belong  to  coins.  In  ancient  times,  among  the  He- 
brews and  Egyptians,  much  commerce  was  carried  on  by 
the  metals  in  the  form  of  bullion,  which  had  to  be  weighed 
at  each  important  transaction.  In  many  parts  of  China 
the  merchant  still  carries  at  his  belt  a  balance  and  touch- 
stone, for  weighing  the  silver  sycee  which  there  serves  as 
money ;  *  but  one  of  the  first  concerns  of  a  modern  govern- 
ment is  the  adoption  of  a  national  coinage  system. 

Coinage  consists  in  dividing  a  metal  into  pieces  of  uni- 
form size  and  fineness  and  indicating  these  characteristics 
by  stamps.  The  word  is  derived  from  cuneus,  a  Latin 
word  meaning  a  wedge  or  die  for  stamping  metal,  and  so 

1  Herv6-Bazin  remarks,  "One  can  hardly  imagine  such  rudi- 
mentary monetary  methods  at  the  ticket-office  of  a  railway  or 
theatre." — TraiU  Elementaire  d'Economie  Politique,  p.  278. 

112 


THE    PRINCIPLES    OF    COINAGE 

called  from  the  stamp  imprinted  on  the  coin.  From  the 
Greek  term  for  coin,  through  the  Latinized  form  numisma, 
has  been  derived  the  modern  term  for  the  study  of  coins — 
numismatics.1 

Coinage  is  a  more  important  incident  of  monetary 
science  than  is  sometimes  understood.  It  gives  to  pieces 
of  the  precious  metals  that  last  touch  of  perfect  exchange- 
ability which  is  essential  to  make  them  money.  In  the 
discussions  which  have  taken  place  between  the  advocates 
of  the  gold  standard  and  those  of  the  double  standard 
stress  has  often  been  laid  upon  the  fact  that  money  of 
full  intrinsic  value  would  stand  the  test  of  fire — that  coins 
of  gold  when  melted  into  ingots  would  not  lose  any  of 
their  original  value.  As  the  fact  is  expressed  by  Bolles: 2 

"Drop  a  ten-dollar  gold  piece  accidentally  into  the  fire 
and  the  finder  can  take  the  lump  to  the  mint,  and  after 
it  has  been  ascertained  that  none  has  been  lost,  he  will 
receive  another  piece  therefor." 

This  statement  involves  a  theoretical  truth  of  the  first 
importance.  In  practice,  however,  it  would  be  difficult 
for  the  holder  of  the  ingot  to  exchange  it  readily  and  with- 
out loss  anywhere  else  than  at  the  mint.  He  would  find 
that,  in  order  to  make  it  acceptable  to  the  dealer  in  com- 
modities, it  would  be  necessary  to  convert  it  into  money.3 
As  Marx  points  out:4 

"That  money  takes  the  shape  of  coin,  springs  from  its 
function  as  the  circulating  medium.  The  weight  of  gold 
represented  in  imagination  by  the  prices  or  money-names 
of  commodities,  must  confront  those  commodities,  within 

1  Vide  Hill,  A  Handbook  of  Greek  and  Roman  Coins,  p.  2. 

2  Money,  Banking,  and  Finance,  p.  13. 

'This  side  of  the  subject  is  tersely  put  by  George,  "A  man 
with  a  ten-dollar  gold  piece  will  find  no  difficulty  in  the  United 
States  in  fairly  exchanging  it  for  anything  he  may  happen  to 
want,  but  he  would  find  much  difficulty  in  fairly  exchanging  the 
same  quantity  of  gold  in  the  shape  of  dust  or  an  ingot,  anywhere 
except  at  a  mint  or  with  a  bullion  dealer." — The  Science  of  Politi- 
cal Economy,  p.  515.  *  Capital,  p.  100. 

1-8  113 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  circulation,  in  the  shape  of  coins  or  pieces  of  gold  of  a 
given  denomination." 

A  system  of  coinage  is  a  plan  for  counting.  The  coined 
pieces  are  simple  multiples  or  subdivisions  of  a  legal  unit, 
even  though  the  unit  itself  may  not  be  coined.1  It  is  in 
the  form  of  coin  that  the  precious  metals  represent  their 
highest  utility  in  ordinary  transactions.  In  large  trans- 
actions, especially  in  foreign  trade,  they  appear  in  the 
form  of  bars  rather  than  coin,  but  in  such  trade  they  have 
almost  exclusively  the  character  of  merchandise  rather 
than  the  special  qualities  of  money.  The  precious  metals 
are  the  merchandise  most  readily  convertible  into  money 
by  taking  the  proper  steps,  but  in  themselves  they  do  not 
possess  the  distinctive  character  which  money  has  ac- 
quired in  modern  society  as  the  result  of  the  specializa- 
tion of  functions.  Bullion  constitutes  the  raw  material  of 
coined  money.  Their  relation  to  each  other  is  thus  de- 
fined by  Meyer:2 

"  As,  with  reference  to  the  fixed  value  of  a  thing,  a  fabric 
has  a  greater  worth  than  the  raw  material  of  which  it  is 
composed,  so  also  is  coin  of  more  value  for  internal  trade 
than  the  gold  and  silver  in  a  raw  state;  and  as  the  manu- 
facturer adds  the  cost  of  manufacturing  to  the  cost  of  the 
raw  material,  so  also  is  the  government  justified  in  reckon- 
ing with  the  cost  of  the  material  the  additional  cost  of  its 
production,  in  order  to  invest  the  coin  in  circulation  with 
a  higher  value  than  the  actual  amount  of  fineness  in- 
dicates." 

So  confirmed  has  become  the  habit  in  modern  society  of 
employing  only  coined  money  as  a  medium  of  exchange 

1  Thus  the  United  States  discontinued  the  coinage  of  the  one- 
dollar  gold  piece  (Act  of  September  26,  1890);  and  the  Philippine 
coinage  act  of  March  2,  1903,  provided  "that  the  unit  of  value  in 
the  Philippine  Islands  shall  be  the  gold  peso,  consisting  of  12.9 
grains  of  gold,"  but  made  no  provision  for  coining  such  pieces. 

1  "Theory  of  the  Coin,  Coinage,  and  Monetary  System  of  the 
World,"  House  Misc.  Doc.,  45th  Congress,  3d  Session,  p.  19. 

114 


THE    PRINCIPLES    OF    COINAGE 

that  coined  pieces  have  often  risen  to  a  considerable  pre- 
mium above  their  bullion  contents  in  cases  where  the 
supply  has  been  limited  and  the  mints  have  been  in- 
accessible. A  regular  movement  of  this  sort  carried 
bullion  from  Australia  to  England  and  coin  in  the  opposite 
direction  until  Australia  was  provided  with  her  own  mint, 
and  such  a  movement  still  goes  on  between  England  and 
South  Africa.1 

When  coins  are  made  of  the  standard  metal,  so  that  the 
metal  in  the  coin  represents  the  value  for  which  it  is  ex- 
changed, the  privilege  of  free  coinage  has  come  in  ad- 
vanced civilized  states  to  be  universally  established.  This 
means  that  any  holder  of  the  standard  metal  may  take 
it  to  the  mint  and  there  have  it  cast  into  multiples  or  sub- 
divisions of  the  standard  unit,  conforming  to  the  law  and 
stamped  with  denominations  indicating  its  value.  It  is 
this  right  of  the  individual  owner  of  bullion  to  have  it 
freely  converted  into  coin  which  keeps  the  coins  and  the 
bullion  of  the  same  exchange  value,  weight  for  weight,  and 
insures  to  the  owner  of  bullion  the  certainty  that  he  can 
have  it  transformed  into  legal  means  of  payment.  Why 
this  privilege  should  be  open  to  every  holder  of  the  metal 
is  thus  set  forth  by  Chevalier:2 

"The  adoption  of  the  precious  metals  or  of  one  of  them 
only  as  the  material  of  money  signifies  that  any  one  may 
discharge  his  obligations  by  means  of  a  proportionate  quan- 
tity of  gold  or  silver.  Hence  arises  the  strict  right  for  every 
owner  of  bullion  of  carrying  his  property  to  the  mint  to 
have  it  clothed  with  the  sign  which  denotes  its  quality  in  a 
manner  indisputable  by  the  creditor.  The  minting  of  gold 

1  "  It  sometimes  puzzles  people  to  understand  how  it  is  that  gold 
should  be  coming  in  from  South  Africa  and  at  the  same  time  being 
taken  out  of  the  Bank  for  shipment  thither.     The  explanation  is 
simple.     Sovereigns  are  wanted  there  as  a  circulating  medium, 
and  as  there  is  no  mint  at  the  Cape,  the  coin  must  be  shipped." — 
Clare,  The  A  B  C  of  the  Foreign  Exchanges,  p.  124. 

2  La  Monnaie,  p.   113. 

"5 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

is  properly  free  in  England,  because  gold  is  there  the  legal 
tender,  the  matter  which  every  creditor  desires  in  pay- 
ment and  which  he  is  bound  to  receive." 

Where  free  coinage  exists,  the  state  does  not  control  the 
quantity  of  standard  money  in  use.  The  quantity  is  con- 
trolled by  those  who  from  motives  of  self-interest  bring 
bullion  to  the  mints  to  be  coined.  If  there  is  a  demand 
for  coins,  bullion  is  freely  brought  to  the  mint;  if  the 
supply  of  coins  is  excessive,  they  can  be  melted  up  for 
exportation  or  conversion  into  plate,  with  the  knowledge 
that  when  the  demand  for  them  again  arises  they  can  be 
replaced  by  bringing  back  bullion  and  offering  it  again  for 
coinage.  Thus  the  control  of  the  supply  of  standard 
money  is  automatic  under  operation  of  the  rule  of  supply 
and  demand.  The  state  has  what  is  called  a  regalian  right 
over  the  coinage,  which  in  the  Middle  Ages  often  meant 
monopoly,  but  in  a  well-regulated  state  now  means  only 
the  exclusive  privilege  of  determining  whether  the  money 
issued  conforms  to  the  uniform  standard  prescribed  by  law. 

Free  coinage  in  the  economic  sense  of  the  phrase  does 
not  necessarily  mean  gratuitous  coinage.  As  already 
pointed  out,  there  is  a  cost  involved  in  converting  ingots  of 
the  standard  metal  into  money.  This  cost  may  be  de- 
frayed by  the  state  from  the  ordinary  proceeds  of  taxation 
or  it  may  be  defrayed  by  the  person  who  brings  the 
bullion  to  the  mint  for  conversion  into  coin.  In  the  for- 
mer case  the  conversion  of  bullion  into  coin  and  coin  into 
bullion  will  be  somewhat  less  hampered,  and  therefore 
more  frequent,  than  where  a  charge  is  made;  but  where 
the  charge  covers  only  the  bare  cost  of  converting  the 
bullion  into  coin,  there  is  not  serious  interference  with  the 
free  play  of  the  principle  of  supply  and  demand  for  money. 
In  Great  Britain  gold  is  nominally  coined  gratuitously  at 
the  cost  of  the  public  treasury.1  The  wear  and  tear  of 

'"In  England  there  is  nominally  no  seigniorage,  every  one 
being  supposed  to  be  able  to  get  coin  at  the  rate  of  £3  175.  lojd. 

116 


THE    PRINCIPLES    OF    COINAGE 

coin  is  also  provided  for  by  an  appropriation  from  the 
public  funds.1  This  policy  contributes  to  keep  the  coins 
constantly  up  to  the  standard  weight,  when,  if  a  charge 
were  made  for  substituting  coins  of  full  weight  for  those 
of  light  weight,  there  would  be  a  tendency  to  keep  light- 
weight coins  as  long  as  possible  in  circulation. 

When  a  charge  is  made  for  coinage,  it  is  called  seignior- 
age or  brassage.  The  latter  term  is  usually  limited  to  the 
approximate  cost  of  converting  bullion  into  coin,  while  the 
term  "seigniorage"  is  applied  to  the  retention  of  a  larger 
proportion  of  the  bullion  offered,  as  a  means  of  profit 
to  the  state.  The  character  of  such  an  exaction  is  well 
indicated  by  the  origin  of  the  word — from  the  Latin  senior 
and  French  seigneur,  meaning  a  lord.  Seigniorage,  there- 
fore, is  a  privilege,  like  that  of  personal  service  and  the 
premiere  noce,  assumed  by  the  seigneurs  in  the  Middle 
Ages,  having  no  justification  in  modern  conditions  in  the 
minting  of  the  standard  coin.  The  case  is  different  with 
the  bare  cost  of  manufacture.  The  true  distinction  in  the 
matter  is  well  set  forth  by  Chevalier:2 


for  every  ounce  of  gold  he  takes  to  the  Mint,  and  thus  to  get  the 
coin  gratis.  But,  in  fact,  every  owner  of  bullion  who  wishes  coin, 
takes  his  gold  to  the  Bank  of  England  (which  by  law  must  take 
all  gold  offered  it  at  the  rate  of  £3  175.  gd.  an  ounce)  and  gets  back 
coin  at  charges,  all  told,  amounting  to  about  \  per  cent.,  preferring 
to  pay  this  sum  of  a  little  over  a  halfpenny  in  the  pound  sterling 
rather  than  suffer  the  delay  that  else  would  follow  and  the  con- 
sequent loss  of  interest  before  he  got  back  the  coin  from  the 
Mint." — Devas,  p.  335. 

1  This  is  also  the  case  under  the  German  Imperial  Coinage  Law 
and  the  Austro-Hungarian  law  of  1892.  In  France  the  coinage 
was  renewed  in  1891  by  the  withdrawal  of  worn  pieces  at  an  ex- 
pense to  the  government  of  about  $80,000 — Pareto,  I.,  p.  246. 
By  the  law  of  1897,  renewing  the  charter  of  the  Bank  of  France, 
the  duty  of  sorting  out  the  light  coins  and  transporting  them  to 
the  mints  was  imposed  upon  the  bank  at  its  branches,  in  order  to 
bring  up  to  a  uniform  standard  of  excellence  with  the  coins  in  and 
around  Paris  those  circulating  in  the  provinces. — Pommier,  p. 
341.  *  La  Monnaie,  p.  91. 

H7 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

"  Whenever  a  government  levies  a  tax  on  the  issue  of 
money,  which  exceeds  the  cost  of  manufacture,  it  falls  into 
the  system  which  makes  of  money  an  arbitrary  sign  in- 
stead of  treating  it  as  a  merchandise,  as  it  is.  Hence  all 
seigniorage  should  be  suppressed.  There  is  a  reason, 
however,  for  maintaining  what  was  specially  called 
brassage  in  the  old  monetary  nomenclature,  which  con- 
sisted in  recovering  the  costs  of  every  nature  which  the 
manufacture  of  money  imposed  on  the  state.  As  Mr. 
McCulloch  says,  the  metal  whose  weight  and  fineness  are 
certified  by  the  government  by  means  of  coinage  has  a 
value  beyond  that  which  lacks  this  guarantee.  It  is  then 
a  simple  requirement  that  the  certificate  should  be  charged 
with  its  cost." 

In  mediaeval  times,  when  the  principles  of  money  were 
unknown  or  disregarded,  the  different  forms  of  coinage 
charges  were  abused  to  add  to  the  royal  revenue.  Thus, 
in  England  the  shere,  or  remedy  allowed  because  of  the 
rudeness  of  the  art  of  coinage,  is  said  to  have  been  availed 
of  by  Elizabeth  to  pay  the  master  of  the  Mint  meagrely, 
with  the  understanding  that  he  might  recoup  himself  by 
making  the  coins  as  light  as  possible  within  the  limits. 
At  the  first  coinage  of  gold  nobles  in  1344,  from  a  pound  of 
gold  £15  was  made,  but  35.  6d.  was  retained  to  cover  ex- 
penses of  mintage  and  £i  for  the  king.1  John  Hull, 
director  of  the  Mint  of  the  Massachusetts  Bay  Colony,  was 
allowed  about  one  shilling  out  of  every  twenty  which  he 
coined,  and  became  rich  enough  to  give  as  a  dowry  with  his 
daughter  her  weight  in  silver  shillings.2  The  tendency 
in  modern  times  has  been  decisively  against  such  excessive 
mint  charges.  With  improvement  in  methods  of  coinage, 
it  has  become  practicable  to  reduce  the  variation  of  new 

1  Vide  Breckinridge,  Legal  Tender,  pp.  34,  35. 

7  Hickcox,  p.  5.  Sumner  declares  that  the  complaints  of  the 
Massachusetts  Mint  "during  the  first  thirty  years  do  not  refer  so 
much  to  its  constitutionality  as  to  the  standard  of  its  work." — • 
Yale  Review  (November,  1898),  VII.,  p.  254. 

IS8 


THE    PRINCIPLES    OF    COINAGE 

coins  from  the  standard  to  very  narrow  proportions.  In 
the  United  States  the  coinage  of  gold  is  gratuitous,  and 
the  departure  of  the  coins  from  the  standard  weight  is  an 
infinitesimal  fraction.1 

There  are  many  technical  details  relating  to  coinage 
which  cannot  be  discussed  in  a  general  work  on  money. 
It  is  important  to  know,  however,  that  coins  are  never 
made  out  of  pure  metal.  Gold,  silver,  and  copper  are 
always  mixed  with  an  alloy,  which  is  designed  to  give  them 
proper  hardness  and  durability.  This  factor  in  coinage  is 
also  one  which  has  been  abused,  in  order  to  make  a  profit 
for  the  coiner  by  diminishing  the  proportion  of  pure  metal 
and  increasing  that  of  alloy.  In  the  United  States  the 
standard  for  gold  and  silver  coins  is  nine -tenths  by  weight 
in  pure  metal  and  one-tenth  in  alloy.  The  alloy  of  the 
gold  coins  is  copper  and  silver  and  of  the  silver  coins 
copper.2 

Under  the  policy  of  free  coinage  it  is  not  practicable  for 
a  state  to  charge  materially  more  than  the  brassage  or  cost 
of  manufacture  of  the  coins  without  deranging  its  mone- 
tary system.  If  an  excessive  seigniorage  is  collected  on 
coins  issued  under  free  coinage,  the  coins  will  tend  to  fall 
from  their  face  value  to  their  bullion  value.  The  fact  that 
the  coined  money  cannot  be  obtained,  except  by  payment 
of  the  full  seigniorage  for  converting  bullion  into  coin,  will 
contribute  to  keep  up  the  value  of  such  an  amount  of  coin 
as  is  required  for  carrying  on  transactions,  but  it  will  tend 
also  to  prevent  the  melting  up  of  the  coins  when  the 
amount  in  circulation  becomes  excessive.  For  exporta- 
tion outside  the  country  where  a  coin  is  used,  it  can  have 
substantially  only  its  value  as  bullion,  but  if  the  coin  is 
used  in  several  countries  it  may  be  shipped  from  one  to 

1  "The  'allowance'  or  remedy  for  gold  of  only  one  one-thou- 
sandth in  fineness  is  an  improvement;  in  England  and  France  it  is 
two  one-thousandths  " — Letter  of  Ernest  Seyd,  on  the  proposed 
United  States  Coinage  Act,  February  17,  1872,  Mint  Report,  1896, 
p.  556.  *  Revised  Statutes,  §  3514. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

the  other  without  being  converted  into  bullion  and  have 
a  somewhat  higher  value  than  the  bullion  which  it  con- 
tains. 

Where  a  considerable  seigniorage  exists,  it  separates  the 
value  of  the  coin  from  that  of  the  bullion  in  such  a  way 
that  the  two  values  may  move  in  opposite  directions  un- 
der varying  conditions  of  supply  and  demand.  Thus  in 
China,  in  1900,  the  large  gathering  of  European  and 
American  troops  which  took  place  to  rescue  their  legations 
from  peril  in  Peking  caused  a  great  demand  for  currency. 
As  practically  the  only  currency  which  the  Chinese  would 
accept  was  the  Mexican  peso,  these  pieces  of  money  rose 
for  a  time  to  a  price  in  gold  which  departed  much  more  than 
usual  from  the  price  of  silver.  Silver  bullion  also  rose  un- 
der an  increased  demand,  but  as  it  was  less  acceptable  in 
many  cases  than  coin,  and  a  considerable  period  would 
be  required  for  converting  it  into  coin,  the  coins  were  at 
a  marked  premium  over  bullion.  The  opposite  tendency 
was  in  operation  in  the  winter  of  1902-03,  when  silver 
bullion  was  falling  rapidly  in  gold  price.  The  fall  caused 
such  alarm  in  Mexico  as  to  the  future  of  the  silver  money, 
that  in  the  eagerness  to  obtain  gold  values  for  silver  the 
enhanced  value  of  the  coin  over  bullion  was  ignored  and 
for  a  time  Mexican  dollars  dropped  to  a  price  as  low  as 
the  bullion  which  they  contained. 

These  instances  of  fluctuations  in  the  relations  between 
coined  money  and  bullion  illustrate  in  a  drastic  way  the 
operation  of  a  general  law  which,  even  in  the  case  of  coins 
issued  under  a  light  seigniorage,  operates  within  a  smaller 
radius  of  change  in  the  relations  between  bullion  and  coin. 
When  there  is  a  demand  for  money,  the  value  of  coin  rel- 
atively to  bullion  rises.  It  often  becomes  profitable  to 
convert  bullion  into  coin.  If  sufficient  bullion  is  not  found 
under  such  circumstances  in  bank  reserves  and  other 
depositories  within  a  country,  it  is  imported  from  foreign 
countries.  On  the  other  hand,  when  money  is  abundant, 
it  becomes  profitable  to  convert  it  from  coin  into  bullion. 

130 


THE    PRINCIPLES    OF    COINAGE 

This  bullion  can  be  exported  in  most  cases  to  foreign  coun- 
tries to  better  advantage  than  the  local  currency.  Thus, 
while  the  variations  between  the  value  of  a  given  coin  and 
of  the  bullion  which  it  contains  are  slight,  they  are  suf- 
ficient to  determine  the  ebb  and  flow  of  the  precious 
metals  under  the  operation  of  the  foreign  exchanges. 
They  also  reflect  the  state  of  supply  of  the  bullion  markets 
according  to  the  rule  laid  down  by  Meyer: l 

"  It  is  self-evident  that  the  variations  in  the  condition 
of  the  gold  and  silver  market  change  the  relation  between 
bullion  and  coin.  When  the  supply  of  gold  and  silver 
declines,  and  the  demand  increases,  then  the  difference 
between  coin  and  bullion  is  small;  it  may  even  happen 
that  the  value  of  the  two  will  be  equalized,  and  even  that 
of  bullion  may  rise  above  coin.  If  the  supply  increases 
and  the  demand  declines,  then  the  difference  between 
coin  and  bullion  becomes  greater,  and  this  happens  be- 
cause the  value  of  bullion  is  really  lowered." 

How  these  variations  in  the  demand  for  gold  affect  its 
movement  from  one  country  to  another,  under  the  rule 
of  supply  and  demand,  must  be  discussed  under  the  sub- 
ject of  the  foreign  exchanges.  What  it  is  important  to 
note  here  is  simply  that  in  foreign  trade  metallic  money 
loses  much  of  the  distinctive  value  it  derives  from  being 
coined  and  is  sought  as  merchandise  in  the  form  of  bars. 
Such  bars  are  preferred  to  coin  because  of  the  greater  ease 
of  handling  them  and  the  greater  uniformity  of  their 
weight  due  to  the  absence  of  wear  and  tear.  This  fact  is 
taken  advantage  of,  even  in  nations  on  a  gold  basis,  by 
raising  the  charge  for  bars  when  it  is  desired  to  husband 
the  national  stock  of  gold.  Thus  the  Bank  of  France, 
while  compelled  to  redeem  its  notes  in  coin  on  demand, 
may  charge  any  price  it  pleases  for  bars.  The  Bank  of 
England  also,  while  paying  its  notes  freely  in  gold 
sovereigns,  frequently  changes  the  price  of  bars.  The 

1  Theory  of  the  Coin,  Coinage,  and  Monetary  System  of  the  World, 
P-  23. 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

price  of  bars  in  "the  open  market"  in  London  fluctuates 
according  to  demand  and  supply.1  The  usual  price  of  bar 
gold  at  the  Bank  of  England  is  775.  gd.  per  fine  ounce,  but 
this  has  been  advanced  as  high  as  78s.2  The  limits  of  such 
changes  must  necessarily  be  small,  however,  for  when  the 
charge  for  bars  makes  them  more  expensive  than  the 
melting  of  coin,  the  latter  will  be  gathered  for  shipment. 
How  this  check  operates  at  Paris  to  prevent  an  arbitrary 
charge  for  bars  is  thus  described  by  Clare:3 

"  When  the  exchanges  are  unfavorable,  the  usual  course 
is  to  refuse  payment  of  large  sums  in  gold  currency,  and  to 
put  a  premium,  varying  from  one  to  six  per  mille,  on  bars 
and  foreign  coin.  To  impose  too  high  a  premium  would 
defeat  the  Bank's  object,  because  if  the  exchange  rises 
beyond  25.40  money-changers  find  it  profitable  to  collect 
coin  and  export  it ;  so  that  the  country  as  a  whole  would 
be  losing  gold,  even  though  the  Bank  retained  its  stock." 

Gold  bars  must  be  converted  into  coin  in  order  to  be 
available  for  internal  circulation.  In  the  case  of  countries 
having  large  stores  of  gold,  however,  held  in  the  central 
bank  or  public  treasury,  the  immediate  conversion  of  the 
bars  into  coin  is  sometimes  delayed  and  the  bars  are 
available  for  re-export  in  case  of  need  without  going 
through  the  double  cost  of  conversion  from  bars  into  coin 
and  back  again  from  coin  into  bars.  Where  the  demand 
for  gold,  moreover,  for  foreign  trade  is  frequent,  as  in 
England  and  France,  the  coins  of  foreign  countries  are 
sometimes  kept  in  stock  ready  for  shipment  to  those  coun- 
tries in  case  gold  is  demanded  to  settle  trade  balances  with 

1  The  effort  to  get  bars  cheap  in  coin  has  even  resulted  in  efforts 
to  depress  the  price  "by  so-called  'wash'  sales  of  small  quantities 
at  a  price  of,  say,  Jd.  or  fd.  below  the  prevailing  one." — New 
York  Evening  Post,  September  20,  1902. 

7  "The  advance  in  the  price  of  bar  gold  at  London  from  775. 
xo^d.  to  783.  reduced  the  gold  import  point  [at  New  York]  from 
$4.84$  for  demand  sterling  to  $4.83." — W all  Street  Journal,  No- 
vember 13,  1903. 

1  Jhe  4  B  C  of  the  Foreign  Exchanges,  p.  127. 


THE    PRINCIPLES    OF    COINAGE 

them.  This  permits  the  Bank  of  England  to  deliver 
American  eagles  for  shipment  to  America,  and  the  Bank 
of  France  to  hold  sovereigns  for  shipment  to  Great  Britain. 
Sovereigns  are  indeed  a  favorite  form  for  carrying  metal- 
lic reserves  in  the  banks  of  Europe,  because  international 
finance  is  controlled  so  largely  from  London  and  interna- 
tional settlements  are  so  often  made  there. 

The  fact  that  such  coins  are  held  to  meet  demands  for 
shipment  abroad  operates  to  advantage  in  fixing  the  price 
of  gold.  Trifling  as  the  difference  is  between  the  value 
of  a  gold  coin  at  different  times  in  the  gold  coin  of  another 
country,  this  difference — due  partly  to  the  cost  of  con- 
version and  partly  to  the  intensity  of  the  demand  for 
certain  coins — is  sufficient  to  permit  slight  variations  in  the 
cost  of  foreign  coins  in  the  national  currency.  Thus  the 
price  for  American  eagles  is  raised  by  the  Bank  of  England 
when  expressed  in  English  sovereigns  when  it  is  desired 
to  check  the  export  of  gold  to  the  United  States.  The 
price  of  sovereigns  is  raised  at  the  Bank  of  France  when 
it  is  desired  to  throw  obstacles  in  the  way  of  the  move- 
ment of  gold  from  Paris.1  The  moment,  however,  that  the 
price  of  eagles  in  London  is  raised  in  English  money  above 
the  cost  of  buying  bars  and  converting  them  into  eagles, 
then  the  measure  becomes  ineffective,  because  the  ex- 
porter of  gold  will  send  gold  bars,  or,  if  he  cannot  get  them, 
gold  sovereigns,  rather  than  pay  an  excessive  price  for 
eagles.  In  the  United  States  this  resource  is  not  available 
to  any  considerable  degree,  because  the  Treasury  of  the 
United  States  does  not  retain  and  sell  foreign  coins.  All 
gold  brought  into  the  Treasury  which  is  not  in  the  form 
of  American  coin  is  converted  into  bars.  An  effort  was 
made  in  1891  to  check  the  export  of  gold  by  authorizing 

1  "  As  to  imports,  the  Reichsbank  (in  Germany)  accelerates  them 
by  the  simple  and  legitimate  expedient  of  paying  a  better  rate  for 
foreign  gold  coin  than  the  tariff-price  of  other  state  banks,  and,  in 
addition,  by  sometimes  bearing  the  few  days'  loss  of  interest  in- 
curred in  bringing  the  gold  over." — Clare,  p  131, 

123 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  secretary  of  the  Treasury  to  impose  a  small  charge  upon 
the  cost  of  gold  bars,  which  had  previously  been  furnished 
for  their  cost  in  coin.1  The  measure  did  not  prove  ef- 
fective, because  the  price  fixed  was  such  that  it  was  cheap- 
er to  export  eagles  and  the  Treasury  was  simply  put  to  the 
expense  of  coining  bars  into  eagles  to  meet  the  demand  for 
export.  Recently  the  Treasury  has  put  few  obstacles  in 
the  way  of  obtaining  gold  bars.  A  charge  of  forty  cents 
for  each  $1000,  about  the  cost  of  manufacture,  has  not 
prevented  the  bars  being  more  attractive  than  coin  for 
meeting  foreign  demands  for  gold.2 

These  general  principles,  however,  apply  to  the  coins 
of  the  standard  metal  rather  than  to  subsidiary  and  minor 
coins.  The  standard  coins  are  those  composed  of  the 
metal  which  is  the  standard  of  value  and  are  themselves 
equal  in  bullion  value  to  the  amount  declared  on  their  face. 
Subsidiary  coins  (which  are  often  called  token  coins,  when 
they  are  tokens  for  more  than  their  value  as  bullion) 
usually  contain  metal  of  less  value  than  that  declared  on 
their  face.  The  quantity  of  these  coins  demanded  in 
business  has  to  be  determined  by  such  arbitrary  indica- 
tions as  may  be  available  and  the  output  kept  within  these 
limits  by  government  authority.8  Hence  only  the  stand- 
ard coins  are  subject  to  the  free  play  of  the  laws  of  money 
in  trade  between  nations,  and  the  subsidiary  or  token  coins, 

1  Legislative  Appropriation  Act  of  March  3,  1891,  §  3. 

2  Shippers  have  preferred  to  pay  this  premium  for  gold  bars  in- 
stead of  obtaining  coin  in  exchange  for  gold  certificates  or  legal 
tenders,  because  the  bars  were  stamped  with  their  actual  weight 
at  time  of  shipment  and  were  of  a  size  and  shape  less  likely  to 
suffer  by  abrasion  during  transportation. — Wall  Street  Journal, 
June  3,  1904. 

1  In  England  the  government  issues  silver  coins  whenever  re- 
quested by  the  Bank  of  England ;  but  as  the  bank  is  compelled  to 
pay  for  the  coins  at  their  face  value  in  gold,  the  profit  being  taken 
by  the  government,  there  is  no  motive  to  demand  more  than  will 
be  absorbed  by  business.  On  the  contrary,  there  is  the  strongest 
motive  for  the  bank  not  to  impair  its  gold  resources  by  paying 
them  out  for  token  coins  which  are  not  needed. 

124 


THE    PRINCIPLES    OF    COINAGE 

unless  under  exceptional  circumstances,  remain  within  the 
country  where  they  are  issued.1  The  principle  which 
keeps  up  the  value  of  these  coins,  when  their  value  de- 
pends upon  the  supply,  is  that  of  their  marginal  utility 
as  a  means  of  carrying  on  small  exchanges.  If  they  could 
be  issued  in  excess  of  the  need  for  them — upon  the  demand 
of  the  owners  of  bullion  who  desired  to  make  a  profit  by 
the  difference  between  their  bullion  value  and  their  face 
value — they  would  tend  to  decline  towards  their  bullion 
value.  The  public  convenience  is  served,  however,  by 
maintaining  a  difference  between  bullion  and  face  value, 
for  the  reasons  set  forth  by  Devine:2 

"There  would  otherwise  be  a  constant  danger  that  the 
subsidiary  coins  would  by  the  fluctuations  in  their  value 
come  to  exceed  that  of  the  standard  coins.  It  would 
then  become  profitable  to  melt  down  the  silver,  nickel, 
or  bronze  coins  for  their  bullion,  which  would  be  more 
valuable  than  the  coins.  This  is  not  illegal,  as  is  the  re- 
verse process,  and  it  is  to  prevent  this  that  the  subsidiary 
coinage  is  generally  slightly  overvalued  in  the  coinage. 
It  is  much  easier  to  prevent  dishonest  persons  from  mak- 
ing coins  without  authority,  i.  e.,  counterfeiting,  than  to 
prevent  the  melting  down  or  the  carrying  out  of  the 
country  of  coins  that  had  risen  in  value  above  that  of  the 
standard  money." 

The  government,  therefore,  takes  under  its  own  de- 
termination the  quantity  of  coins  which  are  not  made  of 

1  This  principle  seems  to  have  been  understood  even  in  early 
times.     In  the  seventh  century  before  Christ  it  is  believed  that 
Gyges,  king  of  Lydia,  first  struck  at  Sardis  electrum  staters  on  the 
Babylonic  and  Phoenician  standards.     "The  stater  of  the  former 
weight  (167  gr.)  constitutes,  perhaps,  the  earliest  precedent  for  the 
usage  of  adapting  a  coinage  to  the  region  or  object  for  which^it  was 
designed,  as  this  piece  is  supposed  to  have  been  limited  in  its  cir- 
culation to  the  interior,  while  the  Phoenician  (about  220  gr.)  was 
reserved  for  commercial  purposes,  where  the  other  would  not  have 
been  acceptable." — Hazlitt,  The  Coin  Collector,  p.  93. 

2  Economics,  p.  223. 

125 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  standard  metal  and  which  in  most  cases  contain  less 
bullion  than  the  exchange  value  which  they  represent. 
This  has  been  especially  the  case  since  the  fall  in  the  value 
of  silver  which  began  in  1866  and  which  has  now  carried 
the  silver  coins  of  the  United  States  and  the  Latin  Union 
down  to  less  than  half  the  values  which  they  purport  to 
represent.  Under  free  coinage  of  silver  it  would  be  impos- 
sible to  maintain  the  value  of  the  coins  materially  above 
that  of  the  bullion  which  they  contain.  Under  govern- 
ment control  of  the  coinage,  however,  the  issues  have  been 
so  limited  that  the  amount  of  these  overvalued  coins  has 
been  kept  as  nearly  as  practicable  within  the  exact  needs 
of  trade.  The  best  regulator  of  the  demand  for  such 
coins  is  to  make  them  exchangeable  at  the  offices  of  the 
government  for  standard  coins.  This  policy  is  not  essen- 
tial, however,  for  keeping  up  their  value,  if  reasonable 
prudence  is  shown  in  fixing  the  volume  of  the  issues.1 
Compliance  with  the  law  of  supply  and  demand,  coupled 
with  the  acceptance  of  these  coins  for  public  dues,  has  kept 
them  up  to  the  face  value  given  them  by  law,  and,  as  the 
result  of  the  great  fall  in  silver,  has  created  a  seigniorage 
of  100  per  cent,  over  their  metal  value. 

1  Exchange  at  par  is  the  policy  of  the  United  States,  Germany, 
Austria,  and  several  other  countries,  but  not  of  the  countries  of  the 
Latin  Union.  Pareto  suggests  that  where  exchangeability  exists, 
it  is  immaterial  whether  the  subsidiary  cojns  are  made  of  silver  or 
some  much  cheaper  material. — Cours  d' Economic  Politique,  I.,  p. 
247. 


IX 

THE   EVOLUTION   OF   OFFICIAL  COINAGE 

The  first  coinage  by  individuals  or  small  communities — Efforts  of 
the  mediaeval  governments  to  acquire  the  privilege  from  the 
seigneurs — The  work  of  private  mints  in  Maryland,  North 
Carolina,  and  California — Reasons  for  coinage  under  govern- 
ment authority — Necessity  for  guarantees  of  uniform  weight 
and  fineness — Evolution  of  modern  coinage  systems  from  units 
of  weight — The  American  and  Mexican  dollar. 

GRADUALLY  the  function  of  coinage  has  been  as- 
sumed by  the  state  as  its  peculiar  prerogative — 
sometimes  in  the  belief  that  a  profit  could  be  obtained  by 
its  exercise,  but  fundamentally  because  it  has  contributed 
to  the  convenience  of  the  commercial  world  that  coins 
should  possess  uniformity  in  size  and  denominations  and 
a  guarantee  of  value  more  widely  known  and  firmly  es- 
tablished than  that  of  the  individual.  So  numerous  have 
been  the  abuses  of  this  prerogative  that  a  writer  has 
occasionally  been  found  to  echo  the  query  of  Leroy- 
Beaulieu,  whether  it  would  not  have  been  better  that  in- 
dividuals or  free  associations  should  have  been  intrusted 
with  the  authority  of  coining  and  certifying  to  the  value 
of  money.  He  suggests  that  this  might  have  been  done 
by  banks  of  established  reputation,  and  that,  even  if  the 
government  was  permitted  to  coin,  contracts  might  have 
stipulated  for  payment  by  weight  of  metal  instead  of  in 
coins.1  This  is  substantially  the  course  that  has  been 

1  "Thus  would  have  been  obtained  the  combined  advantages  of 
coined  money  for  ordinary  transactions  and  of  the  maintenance 
of  the  weight  of  the  metal  as  money  of  account  and  as  final  reg- 

127 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

pursued  where  the  coinage  has  become,  by  accident  or 
design,  too  variable  to  be  a  trustworthy  medium  of  ex- 
change. 

The  first  coinage  seems  to  have  been  either  by  individ- 
uals or  by  small  communities.  It  was  intended  only  to 
give  the  stamp  of  weight  and  fineness  to  the  metal  and 
not  to  give  to  it  a  fictitious  value  by  law.  The  first  coins 
in  both  Athens  and  Rome  bore  the  mark  of  the  origin  of 
the  medium  of  exchange  in  cattle  and  other  familiar  ob- 
jects by  bearing  the  figures  of  these  animals  upon  their 
face.1  The  very  language  used  regarding  the  money  paid 
by  Abraham,  "current  money  with  the  merchant,"  shows 
that  it  was  the  mercantile  community,  and  not  the  govern- 
ment, which  determined  the  standard.  The  first  Greek 
money  of  gold  was  small  stamped  pieces  of  bullion.  These 
were  of  globular,  oval,  and  other  forms,  as  they  were  left 
by  the  imprint  of  the  hammer.  Many  of  them  were  of 
different  alloys,  some  containing  just  enough  gold  to  give 
a  yellowish  color  to  the  silver,  and  bearing  all  the  marks 
of  private  mintage.  Monograms  and  private  symbols 
borrowed  from  the  animal  and  vegetable  kingdoms  were 
the  marks  of  special  mints,  the  property  of  merchants  or 
bankers,  and  were  often  accompanied  by  entire  phrases, 
such  as  "  I  am  the  seal  of  Thersis — take  care  not  to  injure 
me."2 

With  the  concentration  of  authority  in  the  ancient 
world  under  the  Persian  Empire,  Alexander,  and  Rome, 
local  coinages  became  less  frequent.  In  the  body  of  his 
dominions  the  Persian  king  was  able  to  prevent  the  coin- 
age even  of  silver  without  his  approval.  Only  where  his 

ulator  of  large  transactions." — Traite  d!  Economic  Poliiique,  III., 
p.  128. 

1  Theureau,  p.  23.  In  a  similar  manner,  silver  coins  of  the  shape 
of  shells  were  used  in  the  north  of  Burmah. — Ridgeway,  p.  22. 

1  The  private  character  of  this  mintage  has  been  disputed  in 
some  quarters,  but  is  strongly  sustained  by  Babelon,  Les  Origines 
de  la  Monnaie,  chap.  iii. 

128 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

authority  could  not  be  efficiently  exerted,  as  on  the  isl- 
and of  Kypros,  were  independent  coinages  common.  In 
Greece,  it  is  declared  by  Hill,  the  breaking  down  of  the  old 
traditions  of  autonomy  by  Alexander  brought  about  the 
frank  declaration  of  the  royal  prerogative.1  At  a  later 
date  the  chief  currency  of  whole  districts  like  the  Pelo- 
ponnesus consisted  of  federal  coinages,  of  which  the  most 
famous  was  that  of  the  Achaean  League.2  In  the  Roman 
Empire,  local  issues,  both  provincial  and  municipal,  lasted 
into  the  empire,  but  by  the  time  of  Nero  had  been  super- 
seded by  imperial  coins. 

Even  after  governmental  coinage  was  adopted,  it  often 
bore  marks  of  private  bankers,  as  an  indication  that  the 
banker  gave  the  guarantee  of  his  stamp  to  the  work  of  the 
government  mint.  These  stamps  continued  to  be  im- 
printed upon  coins  as  late  as  the  year  400  B.C.,  indicating 
that  certain  clients  were  more  faithful  to  the  credit  of  some 
great  house  than  that  of  the  government.  Private  coin- 
age was  resumed  on  an  extensive  scale  in  the  Middle  Ages, 
when  centralized  government  had  disappeared.  Twelve 
hundred  monetary  types  of  Merovingian  Gaul  have  been 
preserved,  struck  in  more  than  800  different  localities,  and 
among  them  royal  and  ecclesiastical  types  are  the  excep- 
tion. Students  who  did  not  penetrate  to  the  truth  of  this 
problem  undertook  to  account  for  this  varied  coinage 
by  the  wide  dissemination  of  government  mints,  and  ex- 
pressed surprise  at  the  appearance  of  the  names  of  so 
many  individuals,  in  place  of  that  of  the  Roman  emperor, 
attesting  the  weight  and  fineness  of  gold  and  silver  money.3 
The  fact  that  there  were  private  mints  as  well  as  public  is 
suggested  by  the  distinctive  title  of  the  mint  at  Limoges — 
publica  fiscalis  monetce  officina.  The  churches  and  the 
monasteries  also  struck  money  with  the  products  of  their 
revenues  and  put  upon  it  the  names  of  their  religious  es- 

1  A  Handbook  of  Greek  and  Roman  Coins,  p.  82. 

2  Ibid.,  p.  10.  *  Babelon,  p.  40. 

I.-9  I2Q 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

tablishments.1  Cities  and  villages  followed  suit.  This 
varied  coinage  introduced  confusion  into  exchanges  and 
nearly  all  contracts  stipulated  that  they  should  be  fulfilled 
in  money  of  full  weight  and  fineness. 

In  the  Middle  Ages  the  privilege  of  coinage  was  associ- 
ated with  that  of  mining.  Both  of  these  were  treated  by 
the  lawyers  as  nominally  rights  of  the  crown,  but  were  the 
subject  of  repeated  grants  to  individuals  and  corporations. 
Charlemagne  in  805  prohibited  any  coinage  but  that  of  the 
royal  mints,  but  his  successors  were  neither  able  to  refuse 
concessions  nor  to  suppress  unauthorized  minting.  An 
effort  was  made  in  the  thirteenth  century  to  limit  the 
circulation  of  the  money  of  the  lords  to  the  provinces 
where  they  had  authority.2  St.  Louis  endeavored,  as 
several  of  his  predecessors  had  done,  to  substitute  purely 
official  coinage  for  that  of  the  seigneurs — a  measure  which, 
in  the  language  of  Blanqui,  "might  have  had  favorable 
results  if  the  kings  had  not  abused  it  to  artificially  multiply 
their  resources  by  fraudulent  alterations."8  In  1315  royal 
letters  limited  the  weight  and  fineness  of  the  seigneurial 
coinage  in  France,  and  later  the  policy  was  adopted  of 
buying  back  the  rights  of  the  seigneurs.4  When  Charles 
II.  revoked  the  charter  of  the  Massachusetts  Bay  Colony 
in  1684,  one  of  the  avowed  reasons  was  the  creation  by  the 
colony  of  its  own  mint ;  but  circumstances  showed  that  this 
infringement  on  the  royal  prerogative  was  not  considered 

1  Del  Mar  declares  that  "The  baronial  and  ecclesiastical  mints 
of  the  middle  ages,  when  not  authorized  by  the  German  Empire, 
or  by  the  princes  of  the  Western  States,  were  baronial  or  ecclesias- 
tical only  in  name;  they  were  really  robbers'  dens." — History  of 
Monetary  Systems,  p.  6;  but,  however  this  may  have  been,  private 
coinage  was  a  natural  step  in  the  evolution  of  money. 

2  Nys,  p.  182.          *  Histoire  de  F  Economic  Politiquc,  I.,  p.  224. 

4  Nys,  p.  183.  The  seigniorage  which  might  be  charged  by 
private  refiners  of  gold  and  silver  was  fixed  by  royal  decree  as  late 
as  August,  1757,  although  attempts  had  been  made  in  1692,  1719, 
and  1723  to  replace  the  private  guilds  by  public  officers. — Saint- 
Le'on,  Histoire  des  Corporations  de  Metiers,  p.  383. 

130 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

very  grave.  The  mint  had  been  founded  more  than  thirty 
years  before  (in  1652);  its  operations  were  allowed  to 
continue  for  more  than  twenty  years  after  Charles's  res- 
toration, and  when  an  application  was  made  to  continue 
it,  under  the  administration  of  Sir  Edmund  Andros,  it 
was  referred  to  the  British  master  of  the  mint,  who  report- 
ed against  it  merely  upon  "prudential  considerations."1 
When,  eighteen  years  later,  the  value  of  foreign  coins  cir- 
culating in  New  England  was  fixed  by  proclamation  under 
authority  of  Queen  Anne,  the  values  at  which  they  should 
pass  was  set  forth  in  terms  of  New  England  money  or  in 
shillings  substantially  their  equivalent.2 

Private  coinage  has  reappeared  even  in  modern  times 
where  the  machinery  of  official  coinage  has  been  defective. 
"For  a  long  time,"  Jevons  declares,  "the  copper  currency 
of  England  consisted  mainly  of  tradesmen's  tokens,  which 
were  issued  very  light  in  weight  and  excessive  in  number." 3 
The  coinage  of  tokens  in  Ireland  and  the  North  American 
colonies  was  farmed  out  by  a  decree  of  George  I.  in  1722, 
to  Mr.  Wood,  an  iron -founder  of  Wolverhampton,  who 
claimed  to  have  discovered  an  alloy  suitable  for  coins,  con- 
sisting of  copper,  zinc,  and  a  small  proportion  of  silver. 
The  amount  of  the  Irish  coinage  was  limited  to  £105,000, 
but  this  did  not  prevent  a  violent  attack  upon  the  system, 
which  discredited  the  coins  and  compelled  the  govern- 
ment to  buy  back  the  privilege  by  a  pension  of  £3000  a 
year  to  Mr.  Wood  for  fourteen  years. 

Private  coinage  of  a  less  objectionable  character  was 
carried  on  in  North  America  from  colonial  times  down  to 
the  middle  of  the  nineteenth  century.  The  Chalmers 
shilling,  coined  in  1783  by  a  goldsmith  of  Annapolis,  was 

1  Hickcox,  p.  2. 

*  Davis,  I.,  p.  38.  It  appears  from  this  author  that  the  pieces 
were  about  one-quarter  less  in  weight  of  silver  than  the  English 
standard.— Currency  and  Banking  in  tlte  Province  of  Massachusetts 
Bay,  I.,  p.  25. 

8  Money  and  the  Mechanism  of  Exchange,  p.  65. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

famous  in  the  early  history  of  Maryland.  A  private  mint 
was  established  in  1830  by  Templeton  Reid,  of  Georgia,  in 
which  ten-dollar  pieces  were  coined  which  were  found  by 
the  United  States  assayer  to  contain  gold  to  the  value  of 
$10.06.  A  mint  was  established  in  1831  by  Christopher 
Bechtler,  of  Rutherfordton,  North  Carolina,  which  coined 
gold  up  to  1840,  to  the  amount  of  $2, 241, 840. l  The 
United  States  Mint  reported  in  1851  that  twenty -seven 
different  kinds  of  gold  coins,  issued  from  fifteen  private 
mints,  had  been  received  and  assayed  at  Philadelphia. 
California  bristled  with  private  mints  after  the  gold  dis- 
coveries, issuing  fine  gold  coins  bearing  the  names  of  the 
makers  and  passing  without  objection  in  exchange.  Even 
copper  coins  have  been  the  subject  of  private  coinage  in 
recent  times.  No  less  than  164  varieties  of  large  copper 
cents  were  issued  in  the  United  States  during  the  panic  of 
1837,  many  of  them  being  made  vehicles  of  political  satire 
against  President  Jackson.2 

The  universal  decision  of  modern  society  in  favor  of 
coinage  by  the  government  rests  upon  substantial  founda- 
tions, in  spite  of  the  frequency  with  which  the  privilege 
has  been  abused.  One  of  the  reasons  which  especially 
justify  giving  coinage  into  the  hands  of  the  government  is 
thus  summed  up  by  Sidgwick : 3 

"The  ordinary  advantage  to  the  community  from  com- 
petition, in  the  way  of  improving  processes  of  manufacture, 
is  hardly  to  be  looked  for  in  the  case  of  coin.  It  is  the 
interest  of  the  community  that  coins  should  be  as  far  as 
possible  hard  to  imitate,  hard  to  tamper  with,  and  quali- 
fied to  resist  wear  and  tear ;  but  the  person  who  procured 

1  These  and  other  curious  facts  may  be  found  in  the  paper, 
"Curiosities  of  American  Coinage,"  by  A.  E.  Outerbridge,  Jr.,  in 
the  Bulletin  of  the  Free  Museum  of  Science  and  Art  of  the  University 
of  Pennsylvania  (June,  1898),  p.  201. 

*  Falkner,  'The  Private  Issue  of  Token  Coins,"  in  Political 
Science  Quarterly  (June,  1901),  XVI.,  p.  317. 

1  Principles  of  Political  Economy,  p.  446. 

132 


THE    EVOLUTION    OF    OFFICIAL   COINAGE 

the  coin  from  the  manufacturer  would  not  be  adequately 
impelled  by  motives  of  self  -  interest  to  aim  at  securing 
excellence  in  these  points,  since  he  would,  of  course,  want 
merely  to  pass  the  money,  and  not  to  keep  it." 

Regulation  of  money  by  the  state  put  a  stop  at  once  to 
the  frauds  practised  by  goldsmiths  and  private  coiners, 
who  presumed  upon  the  general  acceptability  of  money 
and  the  ignorance  of  many  who  received  it  to  gradually 
reduce  the  amount  of  pure  metal  in  the  coin.  In  the 
Greek  cities  of  Asia  Minor  the  private  coinage  was  mainly 
of  electrum,  which  was  a  mixture  of  gold  and  silver.  The 
proportions  of  the  two  metals  in  the  electrum  coins  varied 
within  the  widest  limits.  Some,  almost  as  yellow  as  pure 
gold,  contained  ninety-five  per  cent,  of  that  metal.  In 
others,  there  was  scarcely  five  per  cent,  of  gold  against 
ninety-five  per  cent,  of  silver.  Specimens  have  even  been 
found  where  the  proportion  of  gold  was  only  two  per 
cent.,  yet  differing  little  in  color  from  those  containing 
sixty  per  cent,  of  the  yellow  metal.1  Even  plated  coins, 
with  an  interior  of  lead,  were  worked  off  upon  the  ignorance 
of  the  people.  Croesus  put  an  end  to  these  abuses  by  the 
demonetization  of  electrum  and  the  issue  of  pieces  of  pure 
gold  or  silver.  The  corruptions  of  the  coinage  had  finally 
become  such  that  coined  money  was  no  longer  an  available 
instrument  of  exchange  or  standard  of  value.  Public 
authority  was  invoked  to  cure  this  evil  and  to  provide  a 
stamp  which  would  give  the  coin  the  respect  of  all  citizens, 
would  make  the  minting  of  the  standard  metal  a  common 
right  instead  of  the  privilege  of  a  few,  and  would  make  the 
value  of  the  coin  the  equivalent  of  what  it  purported  to  be. 

Upon  the  state,  therefore,  has  gradually  devolved  the 
stamping  of  metallic  money,  and  to  some  extent  control 
over  its  issue.  In  early  times,  when  the  various  trades 
were  controlled  by  guilds  and  the  general  rule  in  com- 
merce was  that  of  monopoly  of  privileges,  the  authority 

1  Babelon,  p.  155. 
133 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

to  issue  coins  was  treated  by  princes  as  a  monopoly.  So 
long  as  the  quantity  of  coins  to  be  issued  was  determined 
wholly  at  their  pleasure,  they  found  a  profit  in  debasing 
the  pieces  from  time  to  time  and  thereby  increasing  the 
number  which  could  be  produced  from  a  given  quantity 
of  metal  under  the  old  denominations.  With  the  advent 
of  more  enlightened  knowledge  of  the  functions  of  money, 
the  privilege  of  the  state  has  been  restricted  to  something 
like  that  of  the  custodian  of  weights  and  measures — not 
the  power  to  control  the  quantity  of  instruments  used,  but 
simply  the  power  to  ascertain  that  those  used  are  in  con- 
formity with  the  requirements  imposed  by  law. 

It  is  because  it  is  of  primary  importance  that  coins 
should  have  an  exact,  unvarying,  and  unquestionable 
weight  and  fineness  that  coinage  has  been  brought  to  a 
high  state  of  mechanical  perfection  and  placed  under  so 
many  official  safeguards  in  modern  civilized  countries. 
The  earliest  coins  were  simply  bullets  of  metal,  oval  or 
beam-shaped,  having  on  one  side  the  seal  of  the  commu- 
nity or  individual  responsible  for  the  purity  of  the  metal 
and  the  exactness  of  the  weight.1  But  such  pieces  lent 
themselves  easily  to  alterations  by  others  and  to  debase- 
ment by  their  issuers.  Gradually  were  introduced  stamp- 
ing on  both  sides,  hammering  the  pieces  instead  of  mould- 
ing, and  milling  the  edges.  A  silver  coin  of  Charles  IX.  of 
France,  issued  in  1573,  is  said  to  have  been  the  first  which 
was  marked  with  a  legend  on  the  edge.  English  coins 
were  first  grained  or  marked  on  the  edge  in  1658  or  1662, 
when  the  use  of  the  mill  and  screw  were  finally  established 
in  the  mint.2 

Careful  verification  of  the  weight  and  fineness  of  coins 
by  official  authority  has  been  the  rule  in  highly  civilized 
states.  In  Athens  the  coinage  was  confided  to  three 
special  officials,  of  whom  one  had  general  charge  of  the 
work,  another  attended  to  the  minting,  and  the  third  was 

1  Lane-Poole,  Coins  and  Metals,  p.  u. 

2  Jevons,  Money  and  the  Mechanism  of  Exchange,  p.  60. 

134 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

charged  with  general  surveillance.  The  latter  was  fre- 
quently changed,  in  order,  as  Lenormant  says,  that  he 
might  not  have  time  to  form  ties  with  those  whom  he 
supervised,  "which  would  lead  to  a  complicity  which 
would  facilitate  fraud."1  The  first  Roman  magistrate  to 
establish  the  assay  of  coins  is  said  to  have  been  Marius 
Gratidianus.  His  edict  was  so  popular  that  a  statue  of 
silver  was  erected  in  his  honor.  Long  afterwards,  in  the 
time  of  the  Emperor  Julian  (359-61  A. D.),  it  was  ordered 
that  when  there  was  a  dispute  as  to  whether  a  solidus  was 
good  or  bad,  or  of  proper  weight  or  fineness,  it  should  be 
examined  by  a  magistrate  in  each  large  city.2  In  Great 
Britain  the  adherence  of  the  coin  to  the  legal  standard  is 
determined  by  what  is  called  "the  trial  of  the  Pyx."  A 
certain  number  of  coins  of  each  denomination  are  placed 
after  each  day's  work  in  a  box  called  the  Pyx,  and  an 
official  board  annually  makes  a  rigid  test  of  the  accuracy 
of  the  coinage.  The  standard  troy  pound  is  kept  in  the 
chapel  of  the  Pyx  at  Westminster.  In  the  United  States 
coins  are  set  aside  in  a  similar  manner,  and  are  tested  by 
a  committee  of  citizens  appointed  by  the  President  and 
known  as  the  Assay  Commission.3 

Even  after  money  came  into  general  use  at  the  trading 
centres  and  official  coinage  had  been  adopted  by  leading 
European  states,  gold  and  silver  continued  to  pass  more 
frequently  by  weight  than  by  tale,  and  were  admitted  into 
international  trade  for  their  intrinsic  value  rather  than 
for  marks  impressed  upon  them  by  the  state.  This  was 
the  natural  result  of  debasements  and  wear  and  tear  upon 
the  coinage.  It  has  been  only  in  recent  times  that  the 
state  has  assumed  in  practice  the  jealous  restriction  of  the 
national  circulation  to  the  national  coins  and  made  itself 
responsible  for  their  maintenance  at  their  legal  weight. 

1  La  Monnaie  dans  V Antiquitl,  III.,  p.  52. 

2  Grimaudet,  The  Law  of  Payment,  p.  28. 

*  Vide  report  of  this  commission,  Annual  Report  of  the  Director 
of  the  Mint,  1903,  p.  53. 

135 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

As  late  as  the  seventeenth  century  a  homogeneous  na- 
tional money  existed  only  in  theory.  Commercial  states 
were  compelled  to  be  tolerant  of  coins  of  other  nations, 
because  their  own  official  coinage  formed  but  a  small  part 
of  the  mass  of  money  in  circulation  and  was  mingled, 
especially  on  the  Continent  of  Europe,  with  coins  of  widely 
varying  dates  and  issued  by  a  multitude  of  dead  and  living 
potentates. 

The  means  of  ready  publicity  and  communication  were 
lacking  for  giving  uniformity  to  the  coinage  by  calling 
in  an  old  issue  and  substituting  a  new.  The  Vicomte 
d'Avenel  correctly  declares  that  Europe  in  feudal  times, 
harassed  as  she  was  by  tariffs,  toll-gates,  the  absence  of 
roads,  and  other  political  and  economic  obstacles  to  trade, 
was  more  cosmopolitan  in  respect  to  the  circulation  of 
money  than  Europe  of  to-day.  In  1636  a  French  Royal 
edict  fixing  the  official  ratio  between  French  standard  and 
foreign  money  named  not  less  than  thirty-eight  foreign 
coins  having  circulation  in  law  and  in  fact  in  France,  and 
these  were  only  a  fraction  of  those  in  actual  use.  "By 
the  side  of  the  pistoles  of  Spain  circulated  at  this  epoch 
other  pistoles  struck  by  the  princes  of  Italy,  at  Parma,  at 
Milan,  Florence,  Genoa,  Venice  and  Lucca;  those  of  Liege 
and  the  Dukes  of  Savoy  and  Lorraine ;  one  used  the  double 
ducats  of  Portugal,  the  albertus  of  Flanders,  and  the  coins 
of  the  United  Provinces."  l  In  the  earlier  periods  of  the 
Middle  Ages  there  had  been  still  greater  variety.  Besides 
the  coinages  of  petty  European  princes,  almost  infinite  in 
the  variations  of  their  weight  and  fineness,  circulated  the 
gold  pieces  of  the  Arabian  Empire,  the  ducats  of  Sicily, 
and  the  bezants  and  constantines  of  the  old  Roman  Em- 
pire at  Byzantium. 

Voices  were  raised,  even  in  the  Middle  Ages,  in  favor  of 
limiting  government  interference  with  the  coinage  to 
honest  certification  of  its  weight  and  fineness.  Nicolas 

1  La  Fortune  Privfe  d  trovers  Sept  Sidcles,  p  56. 
136 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

Oresme,  Bishop  of  Lisieux,  in  his  celebrated  treatise 
written  in  the  fourteenth  century ,  regarding  the  invention 
of  money,  declared : l 

"  While,  for  the  common  convenience,  the  Prince  enjoys 
the  function  of  signing  money  and  coining  it,  it  by  no 
means  follows  that  the  Lord  and  Prince  is  or  ought  to  be 
owner  and  lord  of  the  money  current  in  his  principality ; 
for  money  is  the  instrument  and  medium  ((equivalents 
instrumentum)  for  circulating  natural  riches  among  men. 
Money  is  hence  the  true  property  of  those  to  whom  belong 
such  natural  riches;  for,  if  any  one  gives  his  bread  or 
corporal  labor  for  money,  when  he  receives  it,  it  is  his  own 
as  much  as  was  the  bread  or  the  labor  which  were  in  his 
absolute  control." 

Hence,  argues  this  sturdy  admonisher  of  princes,  in  his 
terse  Latin,  the  object  of  the  image  and  superscription  of 
the  prince  is  to  signify  and  make  known  the  certainty  of 
the  weight,  quality,  and  excellence  of  the  coin,  just  as  the 
measure  of  grain,  wine,  and  other  things  bear  his  imprint, 
and  any  one  found  to  have  committed  fraud  in  them  is 
judged  a  swindler.3 

The  fact  that  the  value  of  money  depended,  from  the 
first  use  of  the  metals,  upon  the  weight  of  the  metal,  is 
demonstrated  by  the  derivation  of  the  names  of  the  most 
ancient  coins  from  units  of  weight.  This  is  the  history  of 
the  Chinese  tael,  which  is  perhaps  the  oldest  form  of  money 
still  in  daily  use  among  millions  of  people.  Fischer 
declares,  "  When  one  speaks  of  ten  taels,  it  is  as  if  one 
spoke  of  the  value  of  ten  taels' weight  of  silver."5  It  is 
the  history  also  of  the  Roman  coins,  which  were  related  to 
the  libra,  or  pound;  of  the  livre  of  the  French  coinage, 
from  the  same  root ;  of  the  pound  sterling  of  Great  Britain ; 
of  the  mark,  an  ancient  name  recently  revived  for  the 
coinage  unit  of  imperial  Germany;  and  of  the  peso  of 

1  Tractatus  de  Origins,  Natura,  Jure,  et  Mutationibus  Mone- 
tarum,  chap.  vi.  *  *&«*••  chap.  xii. 

•  Notes  sur  la  Monnaie  et  les  Mtlaux  Precieux  en  Chine,  p.  7. 

137 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

Spain  and  Latin  America  (from  Mediaeval  Latin,  pension, 
a  weight). 

The  pound  troy  (livre  de  Troyes)  owes  its  name  to  the 
city  of  Troyes,  whose  commercial  customs  were  widely 
spread  in  the  Middle  Ages  as  the  result  of  the  fairs  which 
were  held  there.1  Even  though  the  weight  of  the  coin 
was  reduced  by  successive  changes  and  debasements,  until 
it  came  to  contain  only  one-seventy-second  part  of  its 
weight  in  the  time  of  Charlemagne,  it  retained  the  name 
of  livre  until  after  the  Revolution  of  1789,  when  the 
passion  for  baptizing  every  object  with  a  title  suggestive 
of  the  new  political  era  led  to  the  adoption  for  the  French 
unit  of  the  word  franc.  In  Great  Britain  the  pound 
weight  originally  used  as  a  basis  of  the  monetary  system 
was  the  Tower  pound,  but  this  was  superseded  under 
Henry  VIII.  by  the  troy  pound.  The  term  "pound" 
has  survived  many  debasements  of  the  coin  and  is  now 
the  official  designation  of  a  weight  of  gold  which  is  only 
a  fraction  of  its  former  weight.2  The  memory  of  the 
Roman  coinage  survives  in  the  signs  still  used  for  English 
money — £.,  5.,  d.,  standing  for  the  libra,  the  solidus  of 
Constantino,  and  the  denarius,  or  penny.3  The  solidus 
was  translated  in  the  Germanic  languages  into  schilling, 
or  shilling. 

The  term  "dollar,"  which  was  adopted  as  the  name  of 
the  unit  in  the  United  States,  had  a  different  origin.  The 
name  "  thaler"  was  a  contraction  of  the  German  words  for 
the  gulden  groschan  or  penny  of  Jochimsthal  (Jochims- 
thaler  gulden-groschpfennig),  so  called  because  first  coined, 
towards  the  end  of  the  fifteenth  century,  from  the  silver 
obtained  from  the  mines  in  Joachimsthal  (Joachim's  Dale). 
The  size  of  this  coin  seemed  to  commend  it  to  the  com- 
mercial world,  and  its  use  rapidly  spread  over  Europe. 

1  Con.  Puynode,  De  la  Monnaie,  du  Crtdit  et  de  I'lmpdt.  I  ,  p.  7. 
*  How  the  term  was  transferred  by  usage  from  a  silver  to  a  gold 
unit  is  set  forth  by  Carlile,  The  Evolution  o)  Modern  Money,  p.  21. 
•Lane-Poole,  Coins  and  Medals,  p.  97. 

138 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

It  was  declared  in  an  inquiry  into  the  coinage  in  Great 
Britain,  in  1638,  in  complaint  against  the  goldsmiths, 
that  "many  thousands  of  dollars  and  Spanish  money  they 
furnish  yearly  to  merchants  that  trade  for  Norway  and 
Denmark,  to  transport  silver  for  those  parts."  !  The  large 
coinage  of  silver  by  Spain  in  Mexico  made  the  peso,  or 
dollar,  a  familiar  coin  in  the  Western  world,  and  led  to  its 
selection  by  Jefferson  as  the  unit  of  the  monetary  system 
which  was  adopted  in  1786  by  the  Congress  of  the  Con- 
federation of  the  United  States.2 

The  adoption  of  the  sign  ($)  for  the  dollar  is  generally 
ascribed  to  the  designs  on  "the  pillar  dollar"  (colonato), 
which  represented  the  pillars  of  Hercules,  the  ancient 
name  of  the  promontories  on  the  opposite  sides  of  the 
Straits  of  Gibraltar.  While  sometimes  ascribed  to  the 
colonial  coinage,  because  of  the  wide  use  of  these  coins  in 
the  Philippines  and  other  dependencies  of  Spain,  the 
"pillar  dollar"  was  in  its  origin  essentially  a  coin  of  the 
mother-country.8  By  a  strange  coincidence,  it  befell  the 
nation  which  had  made  the  widest  use  of  the  dollar  sign  to 
adopt  a  new  distinctive  sign  for  the  coin  which  superseded 
the  old  Mexican  dollar  in  the  Philippines.  This  was  the 
capital  P  for  peso,  with  two  horizontal,  instead  of  vertical, 
lines  drawn  through  it.4 

In  modern  times  each  civilized  state  has  usually  adopted 
a  distinctive  coinage  system  of  its  own.  Among  the 
barons  of  the  Middle  Ages,  to  issue  their  own  coins  was  a 
mark  of  independence ;  among  modern  nations  it  has  be- 

1  Shaw,  History  of  Currency,  p.  149.  *  Hickcox,  p.  46. 

1  Hazlitt,  The  Coinage  of  the  European  Continent,  p.  512. 

4  Vide  executive  order  of  Governor  Taft,  August  3,  1903,  Report 
of  the  Commission  on  International  Exchange,  1903,  p  408.  These 
Philippine  coins  were  familiarly  called  "Conants,"  because  the 
system  was  based  upon  a  report  made  by  the  present  writer  to  the 
secretary  of  war,  November  25,  1901.  While  this  designation 
was  much  used  to  distinguish  them  from  the  coins  previously  in 
circulation,  it  had  no  formal  official  recognition. 

139 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

come  a  badge  of  national  dignity.1  In  the  beginnings  of 
modern  economy  nations  have  often  begun  without  a 
national  coinage,  especially  where  their  resources  in  the 
precious  metals  were  not  large.  This  was  the  case  in  the 
United  States  in  their  early  history.  Although  a  na- 
tional coinage  system  was  provided  for  by  Congress,  the 
amount  of  metal  brought  to  the  mint  was  small.  English, 
Spanish,  Mexican  and  other  foreign  moneys  were  largely 
used.  This  was  partly  due  to  the  fact  that  the  silver 
dollars  provided  for  by  Hamilton  were  lighter  than  the 
Spanish  dollars.  They  were  promptly  exported,  .ex- 
changed in  the  Spanish-American  countries  for  Spanish 
dollars,  and  the  latter  were  brought  to  the  American  mint 
for  recoinage  at  a  considerable  profit  to  those  making  the 
exchange.2  When  it  became  apparent  that  the  extensive 
operations  of  the  mint  were  not  affording  the  country  a 
stock  of  currency,  but  were  merely  a  source  of  profit  to 
money-lenders,  President  Jefferson  issued  his  famous  order 
of  1806,  suspending  the  coinage  of  silver  dollars,  which 
remained  substantially  in  operation  until  the  provisions 
made  for  reviving  the  coinage  by  the  Bland  Act  of  1878. 
The  value  at  which  the  silver  coins  of  Mexico,  Peru, 
Chile,  and  Central  America  should  pass  current  in  the 
United  States  was  set  forth  in  an  act  of  June  25,  1834. 
By  a  later  act  of  the  same  year  the  gold  coins  of  Great 
Britain,  France,  Portugal,  Spain,  Brazil,  Mexico,  and  Co- 

1  Jefferson  was  even  disposed  to  treat  the  location  of  the  mint 
within  the  country  as  essential  to  national  dignity. — Hickcox, 
pp.  51,  52.     It  has  become  a  frequent  custom,  however,  for  the 
smaller  nations  to  have  their  coins  executed  at  the  well-equipped 
mints  of  Philadelphia  or  Paris.     The  French  mint  between  1893 
and  1901  executed  coinage,  apart  from  that  for  its  own  depend- 
encies, for  Russia,  Greece,  Switzerland,  Crete,  Morocco,  Brazil, 
Venezuela,  Guatemala,  Haiti,  Bolivia,  Chile,  Monaco,  and  several 
other    countries. — Administration    des    Monnaies    et    Mtdailles, 
Rapport  (1903),  pp.  41-55- 

2  Andrew,    "The    End    of   the   Mexican    Dollar,"   in   Quarterly 
Journal  of  Economics  (May,  1904),  XVIII.,  p.  327. 

140 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

lombia  were  given  recognition ;  but  by  the  act  of  Febru- 
ary 21,  1857,  "all  former  acts  authorizing  the  currency  of 
foreign  gold  or  silver  coins,  and  declaring  the  same  a  legal 
tender  in  payment  for  debts,"  were  definitely  repealed. 

In  the  principal  countries  of  the  Orient  a  coin  has  been 
employed  until  recently,  which  has  had,  perhaps,  a  wider 
use  and  more  interesting  history  than  any  other  single 
form  of  coin  in  the  world.  Even  the  coins  of  the  Roman 
emperors  and  the  pound  sterling  of  Great  Britain  have 
hardly  enjoyed  a  use  among  so  many  peoples  and  for  so 
long  a  time  as  the  Mexican  silver  peso.  Issued  in  its 
original  form  in  1535  from  the  Mexican  mints,  which  were 
then  under  Spanish  authority,  it  was  carried  to  the 
Philippine  Islands  while  they  formed  an  appanage  of 
Mexico.  From  there  it  penetrated  to  the  Chinese  ports,1 
and  eventually  into  Japan,  Singapore,  French  Indo-China, 
and  even  to  the  Russian  establishment  at  Vladivostock. 
It  is  not  surprising  that  the  Mexican  peso  should  have 
found  such  a  wide  field,  in  view  of  the  fact  that  from  the 
fifteenth  down  to  the  middle  of  the  nineteenth  century 
more  than  four-fifths  of  the  silver  produced  was  taken 
from  the  mines  of  Mexico  and  Spanish  America.  Mexico 
had  the  mines  and  the  mints;  Spanish  commerce,  in  the 
earlier  days,  had  command  of  the  two  oceans,  and  Spanish 
monarchs  were  masters  of  the  two  Indies. 

One  of  the  reasons  for  the  persistence  of  the  use  of  the 
Mexican  pesos  was  the  comparatively  few  changes  which 
were  made  in  their  weight  and  fineness.  Twice  during  the 
eighteenth  century  they  were  slightly  reduced,  but  the 
weight  and  fineness  adopted  in  1772  (416  grains,  0.902 
fine)  has  remained  undisturbed  to  our  own  day  through 
two  generations  of  Spanish  rule,  and  a  longer  term  under 
the  Mexican  Republic.  In  the  United  States,  as  Andrew 
declares:2 

"During  the  War  of  Independence,  when  the  Federal 

1  Chalmers,  p.  371. 

'Quarterly  Journal  of  Economics  (May,  1904),  XVIII.,  p.  326. 

141 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

Congress  issued  bills  of  credit,  they  made  them  explicitly 
payable  in  the  Spanish  dollars ;  and  when  a  little  later  the 
leaders  of  the  new  republic  set  about  the  establishment 
of  a  national  currency,  Jefferson  only  expressed  the  com- 
mon opinion  in  declaring  that  among  the  various  currency 
units  the  dollar  was  '  the  most  familiar  of  all  to  the  minds 
of  the  people.'" 

It  is  not  surprising  that  a  coin  so  widely  distributed 
throughout  the  world  should  have  been  an  object  of  senti- 
mental attachment  in  Mexico  and  should  have  remained 
long  in  use  after  it  had  been  discarded  in  other  countries. 
Its  gradual  abandonment  in  countries  not  under  the 
sovereignty  of  Mexico  was  due  in  part  to  the  desire  in  each 
country  for  a  distinctive  local  coinage,  but  much  more 
directly  to  the  fluctuations  in  the  gold  price  of  silver, 
which,  after  1870,  drove  one  country  after  another  to  the 
definite  adoption  of  the  gold  standard.  This  movement 
was  slower  in  the  Orient  than  in  Europe.  The  United 
States  undertook  in  1873  to  introduce  into  China  a  sub- 
stitute for  the  Mexican  peso,  known  as  the  "trade  dollar," 
but  the  experiment  was  ultimately  abandoned.  Other 
experiments  were  made  from  time  to  time  by  the  British 
government,  but  it  was  not  until  1895  ^at  ^e  Bombay  or 
"Hongkong  dollar"  was  authorized,  which  became  a 
serious  competitor  of  the  Mexican. 

Japan,  in  1871,  issued  a  silver  piece  known  as  the  yen, 
of  about  the  same  weight  and  fineness  as  the  Mexican 
coin,  but  it  was  only  in  1897  that  she  adopted  the  gold 
standard  and  made  the  circulation  of  foreign  silver  coins 
practically  impossible  within  her  limits.  Her  policy  in 
this  regard  was  followed  by  the  Philippine  Islands  in  1903, 
and  by  the  governments  of  the  Straits  Settlements  (under 
British  authority)  and  French  Indo  -  China.  Even  in 
China  sporadic  attempts  were  made  from  time  to  time  to 
supplant  the  Mexican  coin  by  local  issues.1  Thus  it  came 

1  Chalmers  relates  that  the  British  government  also  tried, in  1844, 

142 


THE    EVOLUTION    OF    OFFICIAL    COINAGE 

about  by  degrees  that  when  Mexico  herself  proposed,  alter 
the  issue  of  3,500,000,000  pesos  from  her  mints,  to  suspend 
the  coinage  of  the  old  peos  and  issue  a  new  one  upon  a  gold 
basis,  an  official  commission  was  compelled  to  report  that 
while  100,000,000  ounces  of  silver  are  sold  annually  in 
London,  the  sales  of  Mexican  dollars  had  dwindled  to 
$10,000,000,  and  that  "the  market  for  the  Mexican  dollar 
is  rapidly  disappearing."1 

So  well  established  has  the  principle  now  become  that 
coinage  is  an  act  of  sovereignty,  that  the  long  series  of  the 
coins  of  the  popes  came  to  an  end  with  the  capture  of 
Rome  by  the  Italians  and  the  end  of  the  temporal  power 
in  1870.  Pius  IX.,  whose  reign  began  in  1846,  continued 
until  then  the  traditions  of  the  oldest  surviving  sovereignty 
in  the  world,  and  the  one,  perhaps,  which  has  issued  the 
greatest  variety  of  beautiful  gold  and  silver  coins.  More 
than  8000  authentic  papal  coins  are  known  to  numis- 
matists, including  those  of  anti- popes,  the  ephemeral 
"Good  Estate"  of  Rienzi,  and  the  republics  of  revolu- 
tionary times.2  It  was  the  aim  of  many  of  the  earlier  pon- 
tiffs to  ennoble  the  function  of  money  by  the  inscriptions 
which  they  put  upon  their  coins;3  but  the  later  issues  of 
Pius  IX.  conformed  closely  to  those  of  other  countries  of 
the  Italian  peninsula. 

The  coinage  systems  now  most  widely  used  are  based 

to  supersede  the  Mexican  coins  by  the  English  monetary  system, 
but  the  Royal  Proclamation  proved  inoperative  and  in  1854  'it 
was  practically  repealed  by  a  decision  of  the  Colonial  Chief  Justice, 
that '  when  contracts  were  made  in  dollars,  payment  must  be  made 
in  such  coins  and  not  in  those  specified  in  the  Queen's  Proclama- 
tion of  1844."'— A  History  of  Currency  in  the  British  Colonies,  p. 

374- 

1  Report  of  the  Commission  on  International  Exchange,  1903,  p. 

'Calboli.  "Les   Monnaies  des  Papes,"  in    La  Rtvue  (August, 
1903).  XLVI,  p.  432 

•Those  of  Innocent  XI.  bore  the  words,  Melius  est  dare  quam 
accipere,  and  those  of  Clement  XIII- .  Da  paupen 

143 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

upon  the  decimal  system  of  enumeration.  The  United 
States  were  among  the  first  to  adopt  this  system  in  the  plan 
enacted  by  Congress  in  1792,  in  accordance  with  the  rec- 
ommendations of  Hamilton.  The  gold  dollar  was  made 
the  unit,  divisible  into  ten  parts,  called  dimes,  and  into  one 
hundred  smaller  parts,  called  cents  (from  the  Latin 
centum,  a  hundred).  The  French  franc,  issued  in  1803, 
was  subdivided  into  one  hundred  parts,  called  centimes, 
but  the  unit  was  of  a  much  lower  value  (19.3  cents  in 
United  States  gold).  The  same  system  was  adopted,  al- 
though with  different  names  for  the  unit,  by  the  other 
countries  of  the  Latin  Union — Italy,  Switzerland,  Belgium, 
and  Greece.  It  was  also  adopted  by  Spain  in  1868,  al- 
though she  did  not  become  a  member  of  the  Union,  and 
was  adopted  after  their  emancipation  from  Turkey  by 
Bulgaria,  Roumania,  and  Servia.  The  German  Empire 
adopted  the  decimal  system  in  1873,  making  the  mark  the 
unit,  worth  23.8  cents  in  United  States  gold,  and  divided 
into  one  hundred  pfennigs.  The  states  of  the  Scan- 
dinavian Union  and  Austria-Hungary,  in  reorganizing 
their  monetary  system  during  the  latter  part  of  the 
nineteenth  century,  adopted  the  decimal  system  with  a 
unit  a  trifle  higher  than  the  franc.  Russia,  in  restoring 
specie  payments  in  1897,  adhered  to  the  decimal  system, 
and  adopted  a  gold  unit  called  the  ruble,  worth  51.5  cents 
in  United  States  currency.  Japan  has  a  unit  of  nearly 
the  same  size,  also  on  the  decimal  system,  representing  the 
value  of  49.8  cents  in  American  gold ;  and  the  new  coinage 
system  of  the  Philippines  is  approximately  the  same,  with 
a  unit  worth  fifty  cents  in  American  gold,  divided  into  one 
hundred  centavos. 


BOOK  II 
THE  PRINCIPLES  OF  THE  VALUE  OF  MONEY 


BOOK    II 

I 

THE    IMPORTANCE    OF    DEFINITIONS 

Many  controversies  on  the  value  of  money  have  been  caused  by 
the  use  of  terms  in  ambiguous  or  double  senses — The  meaning 
of  value  in  relation  to  money — Proper  use  and  limited  signifi- 
cance of  "appreciation"  and  "depreciation"  of  gold — Different 
interpretations  of  value — In  what  respect  is  stability  desirable 
in  the  value  of  money,  in  exchange  value,  labor  value,  or 
utility  value? — Significance  of  the  quantity  theory  of  value 

PROBLEMS  relating  to  the  value  of  money  and  the 
effect  of  changes  in  its  value  upon  industry  have 
perhaps  caused  more  controversy  than  any  other  problems 
in  economics.  The  reason  for  failure  among  economists 
to  reach  substantial  agreement  on  the  subject  has  been 
due  in  a  large  degree  to  inaccuracy  of  definitions  and  the 
confusion  of  ideas  which  has  inevitably  followed  upon  con- 
flicting conceptions  of  the  same  expression.  Among  the 
terms  over  which  these  differences  have  arisen  have  been 
the  definition  of  money  itself;  "the  value  of  money"; 
"appreciation"  and  "depreciation"  in  the  value  of  the 
money  metals  and  of  commodities;  "stability  of  value"  of 
money;  and  the  "quantity  theory"  of  money.  It  is 
necessary,  in  order  to  conduct  an  intelligent  discussion,  to 
understand  the  manner  in  which  changes  in  the  value  of 
money  are  expressed ;  to  ascertain  in  what  sense  the  term 
"value  of  money"  is  used;  to  know  that  the  terms  "ap- 
preciation" and  "depreciation"  in  regard  to  the  precious 

147 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

metals  simply  express  facts,  without  demonstrating  the 
reasons  for  them ;  and  to  determine,  if  stability  is  desired 
in  the  value  of  money,  in  what  kind  of  value  among  several 
kinds  this  stability  is  sought.  Our  first  task,  therefore, 
will  be  to  seek  to  give  a  definite  form  to  these  somewhat 
vague  conceptions. 

The  fact  has  already  been  set  forth  that  the  use  of  the 
word  ."money"  in  this  work,  wherever  it  is  used  strictly 
and  without  qualification,  is  limited  to  standard  coins 
having  in  themselves  qualities  which  give  them  value  in 
exchange  for  other  articles.  The  term  is  not  used  to  in- 
clude bank-notes  and  other  forms  of  credit.  This  dis- 
tinction is  important  in  discussing  problems  relating  to  the 
value  of  money.  Under  modern  conditions  such  discus- 
sions centre  in  the  value  of  gold.  The  attempt  to  discuss 
the  value  of  money  by  bringing  under  the  definition  notes 
and  other  forms  of  credit  introduces  many  elements  of 
confusion,  because  variations  in  the  quantity  of  such  in- 
struments by  no  means  follow  with  any  precision  varia- 
tions in  the  quantity  of  gold.  Their  existence  may  be 
considered  as  diminishing  the  demand  for  metallic  money, 
but  not  as  increasing  the  supply. 

The  value  of  money  is  fixed  by  the  same  principles  as 
those  which  govern  the  value  of  other  commodities — 
supply  and  demand,  as  influenced  by  cost  of  production. 
The  application  of  these  principles  and  their  interpreta- 
tion is  more  difficult,  however,  in  the  case  of  metallic 
money  than  in  that  of  other  commodities  because  the 
terms  which  express  value  are  themselves  terms  of  money. 
As  money  is  the  usual  measure  of  value,  and  the  standard 
with  which  other  values  are  compared,  it  is  difficult  to 
find  simple  forms  of  expression  for  measuring  the  measure 
— for  comparing  the  standard.  The  difficulty  is  made 
greater  by  the  fact  that  value  is  an  intellectual  conception 
rather  than  a  tangible  property  of  matter.  It  is  not 
possible  to  point  to  an  object  and  say  that  it  contains 
value  in  a  definite  amount,  as  it  may  be  said  that  it  pos- 

148 


THE    IMPORTANCE    OF    DEFINITIONS 

sesses  length  or  breadth  or  weight.  Value  involves  com- 
parison with  some  other  object,  and  is  not  a  comparison  of 
visible  qualities,  but  of  the  intellectual  conception  of  the 
relative  utility  of  the  object.1 

The  value  of  diverse  objects  is  measured  by  a  common 
denominator  whose  units  are  expressed  in  money.  When 
the  attempt  is  made,  therefore,  to  determine  the  value  of 
money,  the  determination  can  only  be  made  by  com- 
parison with  some  other  object  or  series  of  objects,  or  by 
some  general  intellectual  conception.  In  the  case  of  such 
objects,  diminishing  demand  leaves  excessive  visible 
supplies  upon  the  market,  lowers  prices,  and  suggests  the 
wisdom  of  reducing  production.  The  case  is  different 
with  metallic  money,  since  the  fall  in  its  price  is  expressed 
only  in  the  enhanced  prices  of  other  commodities,  and  by 
reason  of  its  high  exchangeability  there  never  appears  to 
be  a  supply  upon  the  market  which  cannot  be  disposed  of 
for  its  full  value.  As  the  condition  is  expressed  by  Babelon:* 

"For  iron,  lead,  copper  and  coal  there  are  variable 
quotations  in  the  market  upon  which  they  are  offered.  If 
they  are  too  abundant,  if  their  outlet  is  closed,  if  com- 
petition develops,  their  price  fails,  the  manager  of  the 
mine  sees  his  profits  diminish  and  the  marketing  of  his 
products  become  more  difficult.  If  he  finds  he  is  making 
a  loss,  he  is  forced  to  abandon  the  mine  or  to  await  at  his 
own  risk  the  return  of  better  days.  Quite  otherwise  is 
the  situation  of  the  producer  of  the  monetary  metal.  As 
he  has  the  capacity  of  converting  into  cash  of  legal-tender 
power  all  the  metal  which  he  draws  from  his  mine,  he  has 
always  an  assured  outlet  for  his  product;  there  is  neither 
rise  nor  fall  for  his  pieces  of  twenty  francs,  whatever  the 
number  which  he  may  have  struck." 

'"Naturally,  as  valuation  itself  is  a  less  definite  conception 
than  the  length  or  weight  of  a  thing,  money  can  measure  less 
absolutely  the  value  of  the  thing  than  the  meter  does  for  length 
or  the  kilogram  for  weight." — Beaure,  p.  17. 

'  L,es  Origines  de  la  Monnaie,  p    285. 

149 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

This  difficulty  in  reaching  a  definite  conception  and 
obtaining  a  precise  measure  of  changes  in  the  value  of 
money  has  led  inevitably  to  confusion  in  attempting  by 
money  to  measure  changes  in  the  value  of  other  things. 
It  is  not  precisely,  however,  because  money  is  more 
steady  in  value  than  other  things  that  it  is  especially 
sought.  Its  value  in  relation  to  other  articles  is  as  liable 
to  change  as  the  relations  between  those  other  things  them- 
selves. It  is  because  money  confers  an  option  on  the  hold- 
er to  choose  among  all  objects  in  the  market  that  it  has 
special  value  when  other  things  become  less  readily  ex- 
changeable. As  this  quality  is  set  forth  by  Davenport:1 

"  Currency  is  received  in  its  aspect  of  general  purchasing 
power,  the  question  of  application  being  ordinarily  left 
to  the  future.  The  length  of  time  which  elapses  between 
receipt  and  outlay  depends  in  part  upon  the  character  of 
the  individual  and  his  peculiar  circumstances,  in  part 
upon  the  industrial  and  financial  conditions  of  the  times. 
The  disposition  toward  early  outlay  is  at  one  time  es- 
pecially marked,  while  at  another  time  the  relative  ad- 
vantages of  delay  are  highly  esteemed  and  even  exag- 
gerated." 

It  is  the  power  of  universal  exchangeability — the  com- 
mand over  all  other  objects,  almost  unlimited  in  time  and 
space — which  makes  the  precious  metals  ardently  sought  in 
preference  to  all  other  goods  on  special  occasions.  They 
have  no  such  preference  on  ordinary  occasions.  The  man 
of  intelligence  who  has  capital  does  not  hoard  it  in  the  form 
of  gold  and  silver.  He  converts  it  into  consumable  goods 
or  machinery.  The  contracts  which  he  holds  for  the 
delivery  of  money  to  him  he  is  willing  to  deliver  to  his 
bank  in  return  for  other  similar  contracts,  which  he  em- 
ploys to  obtain  commodities,  and  which  are  cleared  against 
many  other  such  contracts  by  the  mechanism  of  credit. 

There  are  two  forms  of  stating  the  demand  for  money. 

1  Outlines  of  Economic  Theory,  p.  243. 


THE    IMPORTANCE    OF    DEFINITIONS 

both  of  which  relate  directly  to  the  question  of  supply 
and  demand.  The  simplest  meaning  of  the  term,  "the 
value  of  money,"  is  that  of  the  classical  economists,  who 
viewed  value  as  the  relation  between  money  and  prices  of 
commodities.  Money  was  considered  as  having  an  in- 
creased value  when  a  given  volume  exchanged  for  more 
goods  and  a  diminished  value  when  it  exchanged  for 
fewer  goods.  A  high  value  for  money  was  translated  into 
low  prices  and  a  low  value  for  money  into  high  prices,  be- 
cause in  the  former  case  less  money  was  required  to  obtain 
a  given  article  and  in  the  latter  case  more  money.  The 
value  of  money  was  thus  properly  defined  in  its  direct  re- 
lations to  other  goods. 

The  "value  of  money,"  as  used  in  the  money  markets, 
has  a  different  sense,  but  a  sense  not  without  scientific 
justification.  Value  in  this  sense  is  the  price  of  the  rental 
of  money,  and  it  is  for  rental  that  money  is  usually  re- 
quired.1 A  high  value  of  money  in  this  sense  means  that 
the  rate  at  which  money  can  be  borrowed  is  high ;  a  low 
value  means  that  the  rate  is  low.  A  high  value  indicates 
that  the  supply  of  money  is  small  in  proportion  to  de- 
mand, and  a  low  value  that  the  supply  is  large.  Such 
conditions  tend  to  affect  the  value  of  money  in  the  other 
sense — its  exchangeability  for  goods;  but  the  value  in  the 
sense  of  the  rental  price  is  much  more  sensitive  than  the 
value  in  the  sense  of  command  over  goods. 

The  value  of  money,  in  the  sense  of  its  rental  value,  is 
less  than  that  of  almost  any  other  commodity.  A  man 
who  has  a  special  use  for  it  in  normal  times  obtains  it  for 
two,  three,  four,  or  six  per  cent. — a  much  less  rate  of  profit 

1  Pantaleoni  makes  the  proper  distinctions  and  assigns  a  de- 
scriptive name  to  each  form  of  value  "We  must,  therefore, 
avoid  confusing  the  value  of  money,  or  its  power  of  exchange, 
with  the  Value  of  the  Use  of  Money,  or  rate  of  discount.  But 
still  more  must  we  guard  against  confusing  the  value  of  money 
and  discount  with  interest — i.  e  ,  the  value  of  the  Use  of  Capital. "- 
Pure  Economics,  p.  227,  n. 


THE    PRINCIPLES    OF    MONEY   AND    BANKING 

than  is  expected  from  the  use  of  other  forms  of  capital. 
It  is  when  the  relations  between  money  and  other  com- 
modities are  changed  by  the  abuse  of  credit  that  the 
money  market  approaches  the  condition  of  the  produce  or 
stock  markets,  when  many  dealers  have  sold  "short"  and 
are  unable  to  obtain  the  commodities  necessary  to  fulfil 
their  contracts.  Such  conditions  arise  in  times  of  panic 
when  every  man  seeks  to  compel  the  execution  of  contracts 
for  the  delivery  of  money  to  him,  and  seeks  to  obtain 
delay  in  the  enforcement  of  his  contracts  to  deliver  money 
to  others. 

The  value  of  money  in  its  relation  to  other  goods  is 
properly  defined  as  exchange  value.  Exchange  value  in 
the  economic  sense  of  the  term  is  a  relationship,  and  not 
an  inherent  quality.  The  value  which  is  inherent  is 
designated  as  value  in  use,  and  is  illustrated  by  the  value 
of  water  and  the  air,  which  under  ordinary  conditions  do 
not  have  a  price  in  money.  tThe  quality  of  exchange  value 
is  sharply  defined  by  Jevons  thus:1 

"Value  implies,  in  fact,  a  relation;  but  if  so,  it  cannot 
possibly  be  some  other  thing,  A  student  of  economics 
has  no  hope  of  ever  being  clear  and  correct  in  his  ideas  of 
the  science  if  he  thinks  of  value  as  at  all  a  thing  or  an 
object,  or  even  as  anything  which  lies  in  a  thing  or  object. 
Persons  are  thus  led  to  speak  of  such  a  nonentity  as  in- 
trinsic value.  There  are,  doubtless,  qualities  inherent  in 
such  a  substance  as  gold  or  iron  which  influence  its  value; 
but  the  word  Value,  so  far  as  it  can  be  correctly  used, 
merely  expresses  the  circumstance  of  its  exchanging  in  a 
certain  ratio  for  some  other  substance." 

But  even  when  the  term  "  value  of  money  "  is  limited  to 
exchange  value,  there  remains  a  distinction  between  the 
different  standards  by  which  this  exchange  value  is 
measured,  whether  in  relation  to  commodities,  in  relation 
to  cost  of  production  in  labor,  or  in  relation  to  a  composite 

1  The  Theory  of  Political  Economy,  p.  77. 
152 


THE    IMPORTANCE    OF    DEFINITIONS 

standard  made  up  of  commodities  and  labor.  If  the 
meaning  of  "the  value  of  money"  is  limited  to  its  mathe- 
matical relationship  towards  commodities,  then  its  value 
rises  when  commodities  fall  in  price,  and  falls  when  com- 
modities rise  in  price.  In  this  sense  the  "appreciation  of 
money"  takes  place  when  prices  fall;  its  "depreciation" 
takes  place  when  prices  rise.  In  many  of  the  arguments 
which  have  been  made  upon  the  changes  in  the  value  of 
gold  and  silver  in  their  relation  to  commodities,  confusion 
has  resulted  from  a  failure  to  appreciate  the  limitations 
of  such  definitions.  Variations  in  the  exchange  value  of 
an  article  are  indicated  by  changes  in  prices,  and  changes 
in  prices  are  themselves  the  index  of  changes  in  the  ex- 
change value  of  money.  Limiting  the  discussion  to  this 
definition  of  value  it  would  be  futile  to  argue,  for  instance, 
that  gold  has  not  "  appreciated  "  in  regard  to  given  articles 
when  their  prices  had  fallen,  and  equally  futile  to  argue 
that  it  had  not  "depreciated"  when  prices  had  risen. 
Only  by  introducing  a  different  definition  of  value,  which 
should  treat  it  as  a  measure  of  effort  or  of  satisfactions, 
could  it  become  a  subject  of  argument  whether  a  rise  in 
prices  did  not  indicate  a  fall  in  the  value  of  gold,  or  a  fall 
in  prices  indicate  a  rise  in  the  value  of  gold.  The  intro- 
duction of  such  a  different  definition  of  value  is  legitimate, 
but  has  not  always  been  clearly  set  forth  in  discussions  of 
the  subject.  Confusion  has  resulted  from  treating  the 
value  of  money  as  exchange  value  on  the  one  hand,  and 
then  proceeding  to  discuss  the  question  as  though  the 
definition  of  value  referred  to  cost  value  on  the  other 
hand.  A  fall  in  the  exchange  value  of  money  is  the  same 
thing  as  a  rise  in  prices.  The  two  things  cannot  be  separat- 
ed into  cause  and  effect ;  but  statement  of  the  fact  proves 
nothing  as  to  the  cause.1  But  an  appreciation  of  gold 

1  "A  fall  in  the  value  of  money  and  a  rise  in  prices  are  not  two 
occurrences,  certainly  not  two  occurrences  standing  to  each  other 
in  the  relation  of  cause  and  effect;  they  constitute  a  single  occur- 
rence described  jn  two  different  ways.  Unless  there  be  a  rise  irj 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

with  reference  to  commodities  may  be  due  to  causes 
having  no  direct  relation  to  gold,  but  related  to  the  pro- 
duction or  stock  of  the  commodities.  If  a  given  com- 
modity has  been  produced  beyond  the  limits  of  effective 
demand,  so  that  there  is  a  surplus  stock  on  the  market,  its 
price  falls  in  gold,  and  it  may  be  said  in  a  sense  that  gold 
has  appreciated  with  reference  to  this  particular  com- 
modity ;  but  the  real  cause  of  the  change  is  obviously  not 
found  in  the  supply  of  gold,  or  anything  directly  affecting 
that  metal,  but  in  influences  affecting  the  commodity 
which  is  measured  in  gold.  Equally  unrelated  to  changes 
inherent  in  the  precious  metals  is  a  fall  in  the  prices  of 
commodities  which  is  due  to  inventions  and  improve- 
ments in  methods  of  their  manufacture,  which  diminish 
the  amount  of  labor  required  for  producing  them.  The 
desire  for  cheaper  commodities  is  the  natural  popular  ex- 
pression of  the  desire  for  larger  results  from  human  effort, 
but  it  causes  a  confusion  of  reasoning  which  Walsh  thus 
analyzes:  * 

"It  is  thought,  with  or  without  good  reason,  that  the 
desired  fall  in  these  values,  if  occurring,  should  be  marked 
and  measured  by  a  corresponding  fall  in  their  prices. 
And  this  thought  necessarily  involves  the  idea  that  money 
is  to  be  considered  the  standard  measure,  not  of  exchange 
value,  but  either  of  cost  value  or  of  esteem  value." 

The  fact  of  the  "appreciation"  or  "depreciation"  of 
gold  or  silver  with  reference  to  one  or  more  commodities 
may,  therefore,  be  admitted  in  a  given  case,  without 
carrying  the  implication,  which  is  so  often  assumed  as 
inseparably  connected  with  it,  that  the  change  is  because 
one  metal  or  the  other  has  become  unduly  scarce  or  un- 
duly plentiful.  We  shall  see  hereafter  that  "apprecia- 
tion "  of  gold  with  reference  to  one  or  several  other  articles 
may  occur  without  indicating  appreciation  in  regard  to  all 

prices,  there  is  no  fall  in  the  value  in  exchange  of  money." — Pier- 
son,  I.,  p.  367. 

1  The  Measurement  of  General  Exchange  Value,  p.  483. 


THE    IMPORTANCE    OF    DEFINITIONS 

articles,  and  that  it  may  occur  because  an  article  has 
cheapened  in  terms  of  human  labor  rather  than  because 
gold  has  become  dearer.  The  British  Gold  and  Silver 
Commission  suggested  the  restriction  of  the  use  of  the 
words  "appreciation"  and  "depreciation"  thus: ' 

"Which  is  the  more  accurate  expression  in  any  par- 
ticular case  will  depend  upon  whether  the  altered  relation 
of  the  commodity  to  gold  has  arisen  from  some  change 
which  has  affected  gold,  such  as  a  diminished  supply,  or 
some  increase  of  demand  owing  to  its  use  tor  purposes  for 
which  it  was  not  formerly  employed,  or  whether  this 
altered  relation  is  connected  with  a  change  affecting  the 
commodity,  such  as  increased  supply  or  diminished 
demand." 

Whatever  may  be  the  scientific  merit  of  such  a  use  of 
the  terms,  it  would  be  difficult  to  adopt  it  in  practice, 
because  the  distinctions  upon  which  it  is  based  involve 
the  very  propositions  which  are  most  hotly  disputed  by 
the  advocates  of  conflicting  monetary  theories. 

By  the  consideration  of  changes  in  the  relation  of  the 
precious  metals  to  other  articles  is  logically  invoked  an- 
other question  of  the  first  importance:  What  kind  of 
stability  of  value  is  desired  in  the  standard  ?  That  some 
form  or  degree  of  stability  is  desirable  has  hardly  been 
denied,  even  by  the  most  radical  advocates  of  irredeem- 
able paper;  but  there  has  been  a  lack  of  definiteness  in  the 
conception  of  stability  which  has  brought  much  confusion 
into  the  discussion  of  monetary  problems  The  problem 
of  stability  relates  chiefly  to  time — that  money  shall  have 
the  same  value  after  one  year,  after  five  years,  or  even 
after  one  hundred  years,  that  it  has  to-day  Stability 
becomes  important  because  money  is  a  standard  of  de- 
ferred payments  It  is  the  commodity  in  which  contracts 
are  expressed  The  creditor,  parting  with  a  given  com- 
modity to-day,  and  accepting  a  bond  to  pay  in  money  a 

1  Final  Report,  pt.  ii.,  par.  19. 
'55 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

year  or  twenty  years  hence,  desires  to  know  that  the 
money  which  he  now  contracts  to  accept  will  have  at  that 
time  approximately  the  same  value  which  it  has  to- 
day. 

What  is  meant  by  "the  same  value?"  In  many 
quarters  the  answer  has  been  "  the  same  power  to  purchase 
commodities."  At  first  blush  this  seems  the  normal,  if 
not  the  only  intelligent,  answer.  Upon  the  failure  of 
gold  to  conform  to  these  conditions  during  the  generation 
beginning  with  1873  was  based  an  indictment  of  its  justice 
as  a  standard  of  value  for  deferred  payments.  The  same 
quantity  of  gold  commanded  more  commodities  than  in 
1873  in  very  many  of  the  following  years.  Hence,  it  was 
argued,  the  owner  of  gold  enjoyed  an  advantage  over  the 
producer  of  other  things,  and  gold  (according  to  this 
reasoning)  was  an  unstable  and  unsatisfactory  standard 
of  value. 

But  presently  came  the  advocates  of  the  gold  standard 
with  the  discovery  that  there  were  other  ways  of  measur- 
ing stability  than  by  prices  of  commodities.  They  found 
that  for  many  of  the  years  after  1873  a  given  amount  of 
gold  would  command  less  labor — that  wages  had  risen  in 
terms  of  gold,  while  prices  of  many  articles  had  been  fall- 
ing. Prices  had  been  moving  in  one  direction  in  relation 
to  gold ;  wages  had  been  moving  in  the  opposite  direction. 
In  relation  to  certain  commodities  the  appreciation  of 
gold  was  clear.  If  it  appears,  however,  that  wages  were 
rising  in  gold  during  the  same  period,  then,  if  a  definition 
of  its  value  is  adopted  based  upon  its  relation  to  wages, 
the  depreciation  of  gold  is  equally  clear. 

If  the  proper  standard  of  stability  of  value  in  money  is 
its  command  over  labor,  then  gold  has  been  "depreciat- 
ing "  during  the  past  generation  according  to  this  standard 
while  it  has  been  "  appreciating  "  according  to  the  stand- 
ard based  upon  the  exchange  value  of  goods.  Hence 
emerges  the  possibility  of  different  tests  of  stability  of 
value — the  commodity  standard,  represented  by  prices; 

156 


THE    IMPORTANCE    OF    DEFINITIONS 

the  labor  standard,  represented  by  wages.  While  the 
commodity  standard  has  had  the  preference  among  many 
of  those  who  have  opposed  gold  monometallism,  the  labor 
standard  is  emphatically  approved  by  Karl  Marx,  the 
great  advocate  of  the  independence  of  labor.  He  de- 
clares :  * 

"  In  order  to  be  able  to  serve  as  a  measure  of  value,  gold 
must  be  as  far  as  possible  a  variable  value,  because  it  can 
become  the  equivalent  of  other  commodities  only  as  an 
incarnation  of  labor -time,  and  the  same  labor -time  is 
realized  in  unequal  volumes  of  use-values  with  the  change 
in  the  productive  power  of  concrete  labor.  In  estimating 
all  commodities  in  gold  it  is  only  assumed  that  gold  rep- 
resents a  given  quantity  of  labor  at  a  given  moment,  as 
was  done  when  the  exchange  value  of  any  commodity 
was  expressed  in  terms  of  the  use-value  of  any  other 
commodity.  ...  If  the  value  of  an  ounce  of  gold  falls  or 
rises  in  consequence  of  a  change  in  the  labor-time  required 
for  its  production,  then  the  values  of  all  other  commodi- 
ties fall  or  rise  to  an  equal  extent.  Thus,  the  ounce  of 
gold  represents  after  the  change,  as  it  did  before,  a 
given  quantity  of  labor -time  with  regard  to  all  com- 
modities." 

Stability  of  prices  would  constitute  stability  of  ex- 
change value,  but  it  would  be  very  far  from  constituting 
or  proving  stability  of  use  value  or  labor  value;  for,  as 
Kinley  points  out:2 

"There  may  be  depreciation  of  gold  not  shown  in 

1  A  Contribution  to  the  Critique  of  Political  Economy,  p.  77. 

2  Money,  p.  178.     This  is  put  in  another  way  by  Loria:  "  If  the 
cost  of  all  commodities,  money  included,  increases  or  diminishes 
in  the  same  degree,  as  the  result  of  a  decline  or  increase  in  the 
general  efficiency  of  labor,  the  nominal  price  of  commodities  will 
remain  constant,  notwithstanding  the  cost  of  money  has  actually 
changed." — "  Des  Methodes  Propose'es  pour  Regulariser  la  Valeur 
de  la  Monnaie,"  in  Revue  d' Economic Politique  (February,  1902), 
XVI.,  p.  Ha. 

157 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

changed  purchasing  power.  It  is  possible  that  the 
cost  of  production  of  gold  may  diminish  and  that  gold 
may  increase  in  quantity,  but  if  these  changes  are  ac- 
companied by  corresponding  changes  in  the  cost  of 
production  of  goods,  there  may  be  no  change  in 
prices." 

What  is  the  explanation  of  the  phenomenon  of  falling 
prices  and  rising  wages?  It  is  very  simple.  If  the  pro- 
ductive power  of  labor  remained  the  same,  such  a  phe- 
nomenon would  be  practically  impossible.  The  true  ex- 
planation is  the  increase  in  the  efficiency  of  labor.  If, 
therefore,  a  day's  labor  was  made  the  standard  of  the 
value  of  money,  a  stable  standard  would  be  found  in  a 
system  of  money  under  which  wages  remained  unchanged, 
but  through  the  fall  of  prices  their  purchasing  power  over 
commodities  was  increased.  If  the  wages  of  labor,  in- 
stead of  remaining  stationary  have  absolutely  risen  in  gold, 
then  for  labor  gold  has  been  a  depreciating  standard,  in- 
stead of  an  appreciating  one.  That  is,  labor  has  steadily 
increased  its  command  over  gold. 

It  appears,  therefore,  that  the  question  what  sort  of 
"stability  of  value"  is  desirable  must  first  be  answered 
clearly  before  dogmatic  conclusions  can  be  drawn  as  to 
the  appreciation  or  depreciation  of  gold.  It  is  because 
there  has  not  been  agreement  on  such  an  answer,  and  has 
not  even  been  a  clear  conception  that  there  were  different 
standards  of  stability,  that  much  of  the  discussion  of  the 
subject  has  been  inconclusive.  It  is  not  proposed  here  to 
undertake  a  full  discussion  of  the  question  which  standard 
is  preferable.  It  is  possible  that  a  mean  of  the  two 
curves  of  the  rise  in  wages  and  the  fall  in  prices  would  ap- 
proximate substantial  justice  if  such  a  mean  were  ascer- 
tainable  and  a  system  could  be  devised  for  putting  it  in 
force.  We  shall  see,  however,  in  due  time,  that  gold 
changes  in  its  relation  to  other  things  as  the  result  of 
changes  in  the  manner  and  quantity  of  the  production 
of  such  other  things  more  often  than  as  the  result  of 

158 


THE    IMPORTANCE    OF    DEFINITIONS 

changes  in  the  quantity  of  gold,  and  that  the  fact  that 
such  changes  occur  is  a  powerful  factor  in  directing 
the  activities  of  men  in  the  right  directions  and  secur- 
ing a  wise  distribution  of  finished  products  and  of  new 
capital. 


Qualifications  of  the  quantity  theory — Changes  in  the  monetary 
stock  affect  first  those  goods  most  sensitive  to  price  changes 
and  foreign  demand — Prices  of  commodities  determined  by 
their  marginal  utility  with  reference  to  one  another — Influence 
of  rates  of  discount  and  money  reserve  requirements — Im- 
portance of  the  intensity  of  demand  for  particular  goods — 
How  it  affects  their  prices  in  gold. 

THE  value  of  money  is  determined,  like  that  of  other 
commodities,  by  the  principle  of  demand  and  sup- 
ply. This  proposition  has  seemed  so  simple  upon  its  face 
that  the  conclusion  was  reached  by  early  students  of  the 
subject  that  a  change  in  the  quantity  of  goods  without 
change  in  the  volume  of  money,  or,  per  contra,  a  change 
in  the  volume  of  money  without  change  in  the  volume 
of  goods,  must  result  in  a  proportionate  change  in  the 
exchange  value  of  goods  as  expressed  in  money.  Hence 
developed  the  quantity  theory,  expressed  by  John 
Stuart  Mill  in  the  terms  that  "the  value  of  money,  other 
things  being  the  same,  varies  inversely  as  its  quantity; 
every  increase  of  quantity  lowering  the  value,  and  every 
diminution  raising  it,  in  a  ratio  exactly  equivalent."  * 

This  proposition  has  a  certain  basis  of  truth,  but  in 
its  application  to  prices  it  has  been  exaggerated,  if  not 
perverted.  It  has  been  taken  to  imply  that  an  increase 
in  the  quantity  of  money  in  a  community  must  result 
eventually,  if  not  at  once,  in  a  corresponding  increase 

1  Principles  of  Political  Economy,  II.,  p.  30. 
1 60 


THE-  VALUE    OF    MONEY 

in  the  prices  of  all  commodities.  The  confusion  which 
has  so  often  attended  the  discussion  of  the  principles 
which  determine  the  value  of  money  has  been  due  in 
part  to  the  fact  that,  as  money  is  the  measure  of  value 
of  other  things,  the  operation  of  changes  in  its  value  is 
more  difficult  to  follow  than  changes  in  the  values  of  other 
things  which  seem  to  be  so  plainly  expressed  in  terms 
of  money.  If  the  supply  of  wheat  in  the  world  decreases, 
its  value  rises  in  terms  of  other  articles,  so  long  as  the 
supply  and  demand  for  all  those  articles  remains  un- 
changed. A  given  quantity  of  wheat  exchanges  for  more 
gold  as  well  as  for  more  cotton  cloth.  But  the  fact  of  a 
rise  in  the  money  price  of  wheat  reacts  upon  the  prices  of 
some  other  articles,  because  the  demand  for  other  articles 
changes.  The  man  who  has  to  have  wheat  in  spite  of  the 
enhanced  price  is  compelled  to  reduce  his  demand  for 
some  other  article  or  articles.  The  entire  ratio  of  ex- 
change between  the  aggregate  of  commodities  is  modified, 
but  not  in  a  fixed  mathematical  ratio  to  each.  It  is  the 
same  with  money.  In  a  sense,  changes  in  the  supply  of 
money  are  accompanied  by  changes  in  the  value  of  the 
standard  metal  which  is  used  as  money  in  relation  to  the 
whole  mass  of  commodities,  if  this  mass  remains  station- 
ary in  amount.  But  the  manner  in  which  this  change  of 
relationship  finds  expression  is  essentially  different  from 
that  set  forth  by  the  quantity  theory  of  money. 

Between  the  quantity  of  money  and  the  prices  of  com- 
modities, relationship  undoubtedly  exists.1  Few  would 
deny  that  in  the  same  community,  under  conditions  other- 

1  "There  is  a  correlation  between  the  value  of  money  and  its 
quantity,  but  we  shall  never  succeed  in  measuring  exactly  the 
variations  of  this  inherent  value." — Beaure,  p.  55.  Fisher  ap- 
pears to  hold  that  this  is  all  that  is  asserted  by  the  quantity 
theory.  The  quantity  theory,  he  declares,  "  does  not  mean  that  an 
increase  in  the  currency  will  tend  to  raise  general  prices  in  exactly 
the  same  degree;  but  it  does  assert  most  emphatically  that  an 
addition  to  the  currency  will  tend  to  raise  general  prices  in  some 
degree." — Journal  of  Political  Economy  (March,  1896),  IV.,  p.  248. 
I.-H  161 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

wise  similar,  prices  would  be  higher  with  a  stock  of  money 
amounting  to  $1,000,000  than  with  a  stock  of  $100,000. 
The  questions  which  have  caused  discussion  among  econo- 
mists are  how  this  relationship  is  disclosed,  whether  it 
is  a  dominating  factor  in  determining  money  prices  of 
commodities,  and  whether  changes  in  prices  are  the  effect, 
or  are  themselves  the  cause,  of  changes  in  the  stock  of 
money.  The  more  careful  advocates  of  the  quantity 
theory  make  the  qualification  that  the  principle  of  the 
ratio  of  the  value  of  money  to  the  quantity  comes  into 
operation  only  when  other  things  are  the  same.  It  is 
proposed  to  show  here  that  by  changes  in  the  volume 
of  money  there  are  set  in  operation,  in  the  very  nature 
of  the  case,  other  influences  which  make  it  impossible 
that  other  things  should  remain  the  same,  thus  destroy- 
ing one  of  the  premises  of  the  theory. 

There  is  a  resistance  to  a  uniform  and  sudden  revalua- 
tion of  all  commodities  in  terms  of  money  upon  every 
occasion  of  change  in  the  quantity  of  money,  which  re- 
sults in  determining  such  revaluations  according  to  the 
principle  of  marginal  utility.  The  essence  of  the  fallacy 
which  has  spread  such  a  troublesome  pitfall  for  many 
students  of  the  monetary  problem  has  been  that  all  other 
commodities  than  money  have  been  treated  as  a  unit. 
The  true  principle  of  the  value  of  money  is  that,  being 
but  one  among  many  commodities,  changes  in  its  quan- 
tity operate  upon  its  relation  to  other  commodities  only 
under  the  law  of  the  marginal  utility  of  each.  If  money, 
by  becoming  more  plentiful  than  before,  should  suffer 
a  decline  in  marginal  utility,  then  its  relation  to  some 
commodities  would  change,  but  not  necessarily  its  rela- 
tion to  all  commodities.1  The  first  effect  of  an  increase  in 

1  This  fact  seriously  impairs  the  precise  mathematical  reasoning 
of  Walras.  He  admits  that  "from  one  moment  to  another  all  the 
elements  of  the  problem  are  modified,"  but  maintains  that  at  a 
given  moment,  other  things  being  equal,  if  the  quantity  of  money 
increases  or  diminishes,  prices  will  rise  or  fall  in  proportion. — 

162 


THE    VALUE    OF    MONEY 

the  monetary  stock  would  be  felt  upon  those  particular 
commodities  whose  prices  were  most  sensitive  to  changes 
in  the  money  market,  and,  if  the  effect  were  ever  felt  upon 
all  commodities,  it  must  be  long  subsequently;  yet  in 
nearly  all  discussions  of  the  subject  this  obvious  operation 
of  monetary  principles  is  inverted,  and  it  is  assumed,  as 
an  initial  hypothesis  at  least,  that  the  first  effect  must  be 
general  instead  of  particular.1 

The  quantity  theory,  as  generally  presented  by  those 
who  are  not  careful  students  of  monetary  matters,  has 
the  three  important  defects  of  putting  the  cart  be- 
fore the  horse,  in  treating  general  changes  in  prices  as 
caused  by  changes  in  the  quantity  of  money  instead  of 
considering  the  two  phenomena  as  interacting  upon  each 
other;  of  regarding  such  changes  in  prices  of  commodities 
as  are  influenced  by  changes  in  the  quantity  of  money 
as  changes  in  general  prices  instead  of  variable  changes 
in  particular  prices ;  and  of  giving  a  greatly  exaggerated 
importance  to  this  single  influence  which  among  many 
has  to  be  considered  in  dealing  with  prices. 

Theorie  de  la  Monnaie,  p.  46.  But  throughout  his  reasoning  the 
fact  appears  to  be  ignored  that  all  the  new  money  is  not  at  once 
offered  against  all  the  goods  offered  in  exchange  for  money. 
Vethake,  who  lays  down  the  quantity  theory  with  a  good  deal  of 
rigidity,  admits  that  "some  commodities  ordinarily  fluctuate  in 
value  much  less  than  others,  and  labor  is  such  a  commodity" 
(Principles  of  Political  Economy,  p.  150);  but  he  is  little  disposed 
to  accept  the  legitimate  consequences  of  this  fact. 

1  Thus  Sidgwick,  usually  a  careful  and  acute  reasoner,  says, 
"  It  seems,  however,  clear  that  the  mere  fact  that  the  quantity  of 
money  in  a  country  is  altered  cannot  have  in  itself — i.e.,  apart 
from  any  change  in  the  proportions  in  which  it  is  distributed — 
any  tendency  to  alter  the  quantities  or  relative  values  of  the  com- 
modities which  are  bought  and  sold  for  money,  so  far  as  the  terms 
of  exchange  are  settled  subsequently  to  the  alteration  by  com- 
petition and  not  by  custom." — Principles  of  Political  Economy, 
p.  245.  Yet  a  few  lines  further  on  it  is  admitted  that  "the 
actual  process  of  change  in  quantity  of  gold  may  alter  sensibly 
the  distribution  of  wealth ";  and  on  other  points  a  correct  view 
is  taken. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

The  essential  points  at  issue  between  those  who  declare 
themselves  advocates  of  the  quantity  theory  and  those 
who  oppose  it,  are  partly  questions  of  definition,  on 
which  the  real  difference  is  not  so  great  as  might  appear,1 
and  partly  the  more  important  questions  of  the  method 
in  which  changes  in  the  quantity  of  money  operate  and 
the  degree  of  importance  of  such  changes  in  relation  to 
other  principles  affecting  prices.  In  seeking  a  sound 
explanation  of  an  increase  of  prices,  accompanied  by  an 
increase  in  the  stock  of  money,  those  who  reject  the  quan- 
tity theory  would  seek  the  reasons,  according  to  Scott, 
"  in  changed  conditions  in  the  demand  and  supply  of  com- 
modities or  of  gold  or  of  both,  and  would  explain  the  in- 
crease in  the  volume  of  the  currency  as  the  necessary 
result  of  an  increase  in  the  demand  for  money  caused  by 
the  rise  of  prices,  and  in  proof  would  refer  to  the  axiom 
of  monetary  science  that  when  prices  are  high  a  larger 
amount  of  money  is  needed  to  effect  the  exchange  of  a 
given  number  of  commodities  than  when  they  are  low." 2 

Commodities  rise  and  fall  in  their  ratio  of  exchange 
with  other  particular  commodities  according  to  the  law 
of  marginal  utility.  Gold  is  one  of  these  commodities. 
It  is  in  itself  the  commodity  usually  most  sensitive  to 
changes  in  demand.  In  a  sense  it  is  par  excellence  the 
marginal  commodity  of  all  others;  but  the  others  do  not 
form  a  compact  mass  set  over  against  gold.  On  the  con- 
trary, there  are  other  commodities  only  a  trifle  less  sensi- 
tive than  gold  to  changes  in  exchange  value.  In  foreign 
trade  the  surplus  of  gold  in  the  money  market  and  in  bank 
reserves  is  the  most  conspicuous  of  marginal  commodities ; 
but  the  surplus  of  other  articles  may,  and  often  does,  re- 
spond as  quickly  as  gold  to  changes  in  demand  and  supply. 

1  Thus  Laughlin,  after  quoting  a  moderate  definition  of  the 
quantity  theory  by  Carver,  declares  that  "to  admit  that  the 
value  of  the  standard  can  be  influenced  by  supply  is  not  to  admit 
the  usual  quantity  theory  of  money." — Principles  of  Money,  p. 
339»  *  Money  and  Banking,  p.  61. 

164 


THE    VALUE    OF    MONEY 

It  is  the  prices  of  these  particular  articles — not  the  aver- 
age prices  of  all  articles — which  are  most  affected  by  a 
scarcity  of  gold.1  The  money  prices  of  some  of  these 
articles  may  change  radically  from  causes  connected  with 
the  articles  themselves,  as  from  overproduction  which 
greatly  lowers  their  marginal  utility,  or  from  causes  con- 
nected with  the  gold  stock,  or  because  deficient  bank  re- 
serves have  compelled  an  advance  of  discount  rates  and 
forced  producers  of  certain  goods  to  export  them  at  re- 
duced prices  in  order  to  realize. 

It  was  the  theory  of  Ricardo  that  gold  would  flow  to 
or  from  a  country,  according  to  its  requirements,  so  as 
to  restore  its  normal  value  there,  and  thus  maintain  the 
true  national  share  of  the  money  metal.  This  view  is 
well  founded,  if  the  error  is  eliminated  from  the  usual 
interpretation  of  it,  that  gold  stands  on  one  side  and  the 
aggregate  of  all  other  commodities  as  a  compact,  unal- 
terable mass  on  the  other.  Surplus  stocks  of  gold  in 
a  country,  beyond  what  is  required  for  its  ordinary  trans- 
actions, move  easily  to  another  country;  but  the  more 
seriously  the  demand  for  gold  trenches  upon  the  usual 
and  necessary  stock  used  as  a  medium  of  exchange  and 
for  bank  reserves,  the  more  this  intensity  of  demand 
reacts — first  upon  discount  rates,  then  upon  the  prices  of 
securities,  then  upon  the  most  easily  exportable  of  com- 
modities, and  finally  upon  other  classes  of  commodities. 

In  such  movements  of  securities,  as  in  those  of  com- 
modities, there  is  no  uniform  change  of  price  level,  but 
an  infinite  variety  of  changes  due  to  the  varying  marginal 

1  This  principle  is  partially  apprehended  by  Cairnes,  who 
declares:  "The  new  money  can  only  produce  its  effects  by  being 
made  the  instrument  of  demand;  and  the  demand  is  not  distrib- 
uted indifferently  over  commodities  in  general,  but  is  directed 
towards  particular  classes  of  commodities  according  to  the  needs 
and  tastes  of  its  possessors."  But  Cairnes  goes  on  to  argue  that 
in  process  of  time  "the  normal  level  of  both  wages  and  prices  is 
permanently  raised." — Leading  Principles  of  Political  Economy, 
p.  208. 

165 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

utility  of  different  items  under  the  changing  conditions. 
The  best  securities  might  even  advance  in  price  while 
the  more  doubtful  were  declining,  because  of  the  higher 
utility  of  the  former  as  a  means  of  obtaining  money. 
The  fundamental  character  of  foreign  trade  is  an  exchange 
of  commodities ;  and  the  movement  of  other  commodities 
acts  upon  the  movement  of  that  particular  commodity, 
gold,  in  a  manner  to  adjust  to  the  best  advantage  the  re- 
ciprocal utilities  of  each  of  them  The  dominating  influ- 
ence of  the  commercial  movement  is  well  set  forth  by 
Whitaker:1 

' '  We  may  forget  the  titanic  underlying  force  of  the  bal- 
ance of  trade  so  long  as  it  keeps  its  equilibrium.  When 
in  its  minor  vibrations  it  turns  unfavorable  and  then 
swings  favorable,  the  influence  of  the  discount  rate  is  a 
first-rate  agency  to  exercise  in  the  interim  some  control 
over  the  gold  flows.  In  the  event  that  production  in  the  dif- 
ferent nations  pursues  for  a  period  a  pretty  even  dynami- 
cal career,  the  balance  of  indebtedness  may  remain  in  such 
a  state  of  equilibrium,  as  far  as  large  tendencies  are  con- 
cerned, that  the  shipments  of  gold  which  do  take  place  are 
dominated  by  financial  forces.  But  the  rate  of  discount 
can  be  the  ruling  factor  only  while  the  "commercial" 
forces  are  quiescent.  The  national  quotas  of  gold  cannot 
be  maintained  unless  the  balance  of  total  indebtedness 
which  lies  at  the  bottom  of  gold  movements  in  the  long 
run  preserves  its  equilibrium." 

Intensity  of  demand  for  gold  and  for  other  commodi- 
ties determines,  therefore,  their  reciprocal  ratios  of  ex- 
change with  each  other;  and  these  ratios  can  scarcely 
remain  rigid  for  two  successive  moments  in  succession. 
A  large  stock  of  gold,  by  increasing  the  supply,  diminishes 
the  relative  intensity  of  demand  for  a  given  quantity; 
but  the  aggregate  of  gold  in  the  world,  or  in  any  one  coun- 
try, is  never  at  any  given  moment  set  off  for  mensuration 

1  Quarterly  Journal  of  Economics  (February,  1904),  XVIII., 
p.  232. 

166 


THE    VALUE    OF    MONEY 

against  the  mass  of  other  assorted  commodities.  A  re- 
cent writer  on  money,  although  going  to  extremes  in  his 
criticism  of  the  quantity  theory,  gropes  towards  the  true 
solution  of  the  problem  when  he  declares  that  "the  causes 
permitting  a  new  export  are  individual,  and  not  general; 
are  due  to  relative  expenses  of  production  or  to  changes 
in  relative  demand  and  supply,  and  not  to  a  general 
change  of  prices."  ' 

The  movements  of  money,  under  the  principle  of  mar- 
ginal utility,  are  governed  to  a  large  extent  by  the  rate 
charged  for  its  use.  If  there  is  a  disproportionate  increase 
in  the  money  supply  of  a  country — resulting,  for  instance, 
from  a  large  production  of  gold — this  increase  finds  its 
first  expression  by  an  increase  in  bank  reserves.  An 
increase  in  reserves  increases  the  loaning-power  of  banks, 
and  an  increase  of  loaning-power  means  that  more  cir- 
culating capital  is  placed  at  the  command  of  the  com- 
munity for  investment.  If,  however,  the  loaning-power 
of  the  banks  is  already  sufficient,  under  existing  industrial 
conditions,  for  the  needs  of  the  community,  an  increase 
in  the  supply  tends  to  reduce  the  value  of  the  use  of  money. 
This  reduction  is  expressed  in  the  first  instance  by  a  de- 
cline in  the  rate  for  demand  loans  rather  than  by  a  change 
in  the  money  prices  of  commodities.  Hence  comes  about 
the  distribution  of  money  according  to  its  marginal  utility 
in  different  markets,  in  the  manner  indicated  by  the 
writer  who  has  been  most  earnest  in  denying  the  force 
of  the  quantity  theory:' 

"  The  new  gold  is  purchasing-power  over  other  things, 
at  home  and  abroad,  just  as  wheat  is;  its  value  at  home 
and  abroad  is  settled  in  relation  to  other  things  in  the 
same  general  way  as  is  the  value  of  wheat,  and  by  the 
same  general  laws  of  value.  If  a  miner  or  a  country  has 
more  gold  than  is  needed  for  monetary  (or  non-monetary) 
purposes,  the  surplus  of  it  is  sold  for  other  things,  just 

1  Laughlin,  Principles  of  Money,  p.  371.  *  Ibid.,  p.  338. 

167 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

as  in  the  case  of  a  surplus  of  wheat.  A  mining  country 
sends  gold  to  those  other  countries  which,  by  reasons  aris- 
ing from  the  demands  of  business,  need  more  bank-re- 
serves or  more  gold  as  a  medium  of  exchange;  ...  or 
if  none  is  needed  for  monetary  purposes,  then  it  goes  to 
the  purchasers  of  plate,  of  ornaments,  and  the  like." 

If  the  new  stock  of  money  remains  at  home,  it  enables 
banks  to  place  additional  capital  at  the  command  of  cer- 
tain persons  for  buying  materials  and  machinery  for  their 
industries.  This  increases  the  demand  for  such  articles, 
and  tends  to  raise  their  price.  If  the  rise  is  sufficient, 
however,  to  attract  such  articles  from  abroad,  the  ten- 
dency will  be,  other  things  being  equal,  to  increase  the 
exportation  of  the  money  metal  and  thereby  promote 
its  international  distribution.  Thus  the  state  of  foreign 
trade  is  the  most  sensitive  barometer  of  changes  in  the 
relation  between  money  and  certain  articles,  because 
these  articles  flow  away  from  those  points  where  their 
marginal  utility  is  less  than  that  of  money  to  those  where 
it  is  greater.  Their  marginal  utility  is  necessarily  graded 
by  their  price  as  expressed  in  money;  but  it  is  not  the 
whole  mass  of  commodities  which  is  thus  affected  at  once, 
but  those  whose  relations  to  other  commodities,  among 
which  money  is  included,  have  been  changed. 

Hence  arises  the  important  distinction,  that  there  can- 
not be  a  change  in  general  prices  as  the  result  of  changes 
in  the  voVime  of  money,  but  only  changes  in  particular 
prices.  The  prices  of  certain  articles  may  be  falling 
because  of  overproduction  at  the  very  moment  that  the 
prices  of  others  are  rising  because  of  increased  demand. 
If  the  stock  of  money  is  increased,  it  may  cause  a  rise 
in  the  price  of  those  articles  whose  marginal  utility  is 
greatest  under  the  new  conditions.  There  may  be  one 
or  more  articles  which,  on  the  one  hand,  are  not  demanded 
by  consumers  in  the  existing  state  of  individual  resources, 
but,  on  the  other  hand,  might  become  in  large  demand 
if  the  purchasing  power  of  certain  elements  in  the  com- 

168 


THE   VALUE    OF   MONEY 

munity  should  be  increased.  This  might  be  the  case,  for 
instance,  with  carriages  or  gloves.  The  demand  might  be 
small  at  a  certain  stage  of  purchasing  -  power.  It  might 
rise  in  a  marked  degree  if  the  purchasing-power  of  a  por- 
tion of  the  community  were  increased  by  a  small  per- 
centage. 

.Under  such  circumstances  the  increase  in  the  quan- 
tity of  money  would  first  operate  to  increase  the  profits 
of  certain  manufacturers  who  dealt  with  the  banks,  and 
their  increase  of  profits  would  enable  them  to  increase 
their  demand  for  certain  articles.  The  usual  form  of 
stating  the  effect  of  a  change  in  the  volume  of  money 
would  imply  that  the  increased  demand  for  commodi- 
ties would  be  in  the  form  of  a  demand  for  a  proportion- 
ate increase  in  all  the  commodities  previously  used.  This 
assumption,  however,  is  so  contrary  to  probability  that 
it  cannot  be  safely  made  the  basis  of  general  reasoning. 
On  the  contrary,  the  demand  arising  from  an  increased 
command  over  capital  would  almost  inevitably  be  di- 
rected into  particular  channels  instead  of  a  general  one. 
The  man  who  was  richer  than  before  would  not  demand 
an  increased  stock  of  wheat  and  ready-made  clothing 
proportionate  to  his  increase  in  wealth.  He  would  be 
more  likely  to  increase  his  demand  for  gloves  and  car- 
riages. Hence  the  stock  of  carriages  or  gloves  would 
become  deficient  in  relation  to  the  stock  of  gold.  In 
that  case  the  article  exported  would  be  gold;  carriages 
and  gloves  would  rise  in  price,  and  an  increased  quantity 
would  be  drawn  into  the  country  through  the  channels 
of  foreign  trade;  but  wheat  and  ready-made  clothing 
would  be  little  disturbed  in  price. 

The  demand  for  gold  from  abroad  would  become  ef- 
fective only  when  its  marginal  utility  was  greater  than 
that  of  any  other  article  which  might  be  imported.1  It 

'This  idea  is  expressed  in  a  different  form  by  Pierson:  "In 
countries  which  acquire  their  bullion  by  commerce,  bullion  has  a 
cost  price— is  acquired  by  production.  The  cost  price  in  this 

169 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

would  not  be  imported  if  securities  or  loans  on  bills  of 
exchange  were  more  economical.  Gold  would  be  ex- 
ported only  when  its  marginal  utility  at  home  was  less 
than  that  of  other  articles  which  might  be  exported ;  but, 
when  the  marginal  utility  of  these  other  articles  declined 
in  reference  to  gold  by  reason  of  an  excessive  production 
of  them  and  a  scarcity  of  gold,  then  gold  would  be  im- 
ported in  preference  to  other  articles.  In  all  these  cases 
the  changes  must  necessarily  occur  by  changes  in  the 
relation  between  the  marginal  utility  of  a  variety  of  ar- 
ticles, among  which  gold  would  be  one. 

Money  is  required  under  normal  conditions  as  a  tool 
of  exchange,  and  not  as  the  ultimate  object  of  exchange. 
The  demand  for  it  as  such  a  tool  has  much  to  do  with 
determining  its  value.  If  the  supply  is  excessive  in  its 
ratio  to  demand,  its  value  falls;  but  the  manner  in  which 
this  fall  is  expressed  is  very  different  from  a  revaluation 
of  the  mass  of  other  commodities  in  the  ratio  of  the  change 
in  the  quantity  of  money.  The  changes  in  the  quantity 
of  money  which  occur  in  a  well-equipped  society  are  not 
felt  first  even  in  the  prices  of  the  most  sensitive  exporta- 
ble goods.  They  are  felt  in  the  form  of  changes  in  the 
rate  charged  for  the  use  of  money — by  variations  of  the 
discount  rate.  The  modern  mechanism  of  credit,  of 
which  the  discount  rate  is  a  part,  affords  several  steps 
for  restoring  equilibrium  between  demand  and  supply 
of  metallic  money  before  prices  of  commodities  are  seri- 
ously affected. 

The  rule  that  the  distribution  of  money  is  governed 
by  the  rate  of  discount  is  to  be  interpreted  somewhat 
strictly.  It  is  limited  to  money  as  a  specific  commod- 
ity, the  tool  of  exchange,  and  to  discount  as  the  rate  for 
short-term  loans.  The  definition  is  not  intended  to  cover 

case  is  represented  by  the  quantities  of  labor  and  capital  that 
have  to  be  applied  in  order  to  produce  the  goods  in  exchange  for 
which  the  bullion  is  supplied  from  abroad." — Principles  of  Eco- 
nomics, I.,  p.  375. 

170 


THE  VALUE  OF  MONEY 

all  loans  of  capital  nor  loans  at  interest  for  long  terms.1 
The  rate  of  interest  is  the  charge  for  the  use  of  capital: 
the  rate  of  discount  includes  more  directly  the  charge 
for  the  use  of  money.  Money  is  a  part  of  capital ;  and  the 
two  demands — for  money  and  capital — are  often  con- 
fused with  each  other. 

The  discount  rate  and  the  interest  rate  are  not  far 
apart  when  there  is  only  a  normal  demand  for  money 
as  such,  but  the  discount  rate  rises  far  above  the  inter- 
est rate  on  loans  for  long  terms  when  an  abnormal  de- 
mand for  money  makes  it  more  sought  after  than  other 
forms  of  capital.  It  is  through  the  discount  rate  that 
the  ability  and  readiness  to  pay  money  on  demand  is 
maintained  by  the  banks.2  Ordinary  demands  for 
banking  accommodation  are  demands  for  capital  or  for 
transferable  credits  which  can  be  used  in  lieu  of  money 
for  immediate  needs. 

While  the  use  of  gold  for  money  is  usually  referred  to 
as  its  use  as  a  "medium  of  exchange,"  it  is  well  pointed 
out  by  Seager  that  there  is  a  distinction  between  the 
gold  actually  employed  in  exchanges  and  that  set  aside 

1  "The  rate  of  discount  in  the  short-loan  market  of  a  banking 
centre  like  London  is  not  to  be  identified  with  the  rate  for  loans 
generally — it  is  only  the  rate  for  special  loans  between  special 
classes  of  borrowers  and  lenders,  affected,  no  doubt,  by  the  gen- 
eral rates  obtainable  for  loans  and  investments  in  the  country, 
but  nevertheless  a  thing  sui  generis,  and  in  which  there  may  be 
great  changes  without  corresponding  changes  in  the  general 
borrowing  rates." — Giffen,  Essays  in  Finance,  II.,  p.  47. 

J  Joseph  French  Johnson  makes  a  further  distinction  between 
the  rate  of  discount  on  commercial  loans  and  the  call-loan  rates  of 
interest,  which  is  of  some  importance.  He  declares  that  "the 
speculator  stands  among  borrowers  as  a  residual  claimant  upon 
capital,"  getting  "temporary  control  of  capital  while  it  is  en 
route  from  the  saver  to  the  entrepreneurs."  Both  the  supply 
and  the  demand  for  the  residuum  fluctuate  much  more  widely 
than  the  demand  for  commercial  loans,  with  the  result  of  wider 
differences  in  rates. — Political  Science  Quarterly  (September, 
1900),  XV.,  p.  500. 

171 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

in  bank  reserves.  In  view  of  the  great  increase  in  such 
reserves,  including  those  of  governments  and  individuals, 
his  conclusion  is  probably  justified,  that,  "if  all  of  the 
different  items  which  should  be  included  could  be  exactly 
calculated,  it  would  doubtless  be  found  that  the  reserve 
demand  for  gold  is  larger  than  either  of  the  other 
demands  " — for  the  arts  or  as  a  medium  of  exchange.1  At 
first  sight  it  might  appear  that  this  is  a  distinction  with- 
out a  difference,  because  the  reserve  gold  is  in  fact  in  use 
as  a  medium  of  exchange  through  its  paper  representa- 
tives. If  the  reserve  gold  were  held  dollar  for  dollar 
against  paper  issued  in  substitution  for  it,  like  the  gold 
certificates  of  the  United  States,  its  employment  would 
in  fact  differ  in  no  essential  respect  from  that  actually 
passing  from  hand  to  hand.  But  the  manner  in  which 
it  is  employed  in  reserves  is  very  different.  It  is  made 
the  basis  of  credits  which  sometimes  seem  indefinitely 
expansible. 

A  great  diminution  of  metallic  reserves  in  banks  will 
undoubtedly  react  upon  the  discount  rate,  and,  if  per- 
sistent, upon  the  prices  of  those  exportable  goods  of  which 
the  supply  is  verging  nearest  to  overproduction;  and 
a  counter-influence  of  declining  discount  rates  will  be 
felt,  other  influences  being  approximately  the  same,  when 
bank  reserves  are  greatly  increased.  But  considerable 
changes  in  the  quantity  of  gold  in  reserves  may  take 
place  before  any  effect  is  felt  upon  prices.2 

That  a  great  increase  in  the  volume  of  gold  in  a  com- 
munity will  have  an  influence  tending  to  raise  prices, 
and  a  great  decrease  a  contrary  effect,  is  not  the  subject 
of  dispute.  The  question  is  how  this  influence  operates. 

1  Introduction  to  Economics,  p.  350. 

1  As  the  proposition  is  put  by  Kinley:  "Gold  is  used  in  making 
direct  payments,  and  for  a  reserve  to  insure  solvency.  An  equi- 
librium is  established  between  the  marginal  utility  of  gold  for 
these  two  purposes,  and  then  between  this  equilibrium  and  the 
marginal  utility  of  goods."—  Money,  p.  145. 

172 


THE  VALUE  OF  MONEY 

That  it  operates  under  the  modern  organization  of  in- 
dustry without  any  direct  mensuration  of  the  mass  of 
goods  in  money — either  metallic  money  or  the  combined 
sum  of  such  money  and  paper — is  the  contention  of  those 
who  deny  the  sufficiency  of  the  quantity  theory.  In 
the  case  of  reserve  gold,  just  discussed,  it  is  obvious  that 
the  question  is  largely  psychological.  The  esteem  value 
of  money  operates  powerfully  upon  its  exchange  value. 
So  long  as  the  manufacturer  can  exchange  his  products 
readily  for  other  products  at  prices  which  seem  to  show 
a  net  profit,  gold  has  little  esteem  value  in  his  eyes.  He 
is  almost  ready  to  accept  the  illusions  of  the  advocates 
of  ideal  money  and  the  multiple  standard,  that  trade  is 
wholly  barter,  in  which  the  intervention  of  real  money 
is  a  relic  of  an  outgrown  superstition.  When  the  fact  is 
brought  home  to  him,  however,  that  his  goods  have  lost 
esteem  value,  because  of  overproduction  or  for  other 
reasons,  and  this  fall  of  esteem  value  in  the  minds  of 
others  finds  expression  in  a  lower  valuation  of  his  goods 
in  gold,  then  suddenly  rises  in  his  mind  the  esteem  value 
of  real  money — the  one  common  form  of  value  which  is 
always  exchangeable  for  other  forms  of  goods.  He  real- 
izes the  force  of  the  maxim  of  Marx,  that  whether  "labor 
is  useful  for  others,  and  its  product  consequently  capable 
of  satisfying  the  wants  of  others,  can  be  proved  only  by 
the  act  of  exchange."  l 

The  reduction  of  prices  which  occurs  at  the  time  of 
an  economic  crisis  is  not  due  to  trifling  changes  in  the 
volume  of  metallic  money  in  the  country,  nor  even  to  a 
change  in  the  volume  of  credit  money  directly  proportion- 
ed to  the  metallic  reserves.  It  is  due  to  the  derangement 
of  the  ordinary  mechanism  of  credit  and  constitutes  to  a 
considerable  extent  a  demand  for  money  for  hoarding 
rather  than  as  a  medium  of  exchange.  The  demand  for 
money  as  a  medium  of  exchange  would  naturally  be 

1  Capital,  p.  57. 
173 


THE  PRIXCIPLES  OF  MONEY  AND  BANKING 

greatly  diminished  by  the  cessation  of  commercial  activity, 
but  the  demand  for  hoarding  creates  the  seeming  paradox 
that  a  country  absorbs  the  largest  volume  of  money  when 
prices  are  most  rapidly  falling.1 

The  distinction  between  the  regulation  of  the  move- 
ment of  money  by  the  discount  rate  rather  than  by  the 
prices  of  commodities  is  a  fundamental  one.  It  is  fun- 
damental because  of  the  distinction  between  money  and 
capital.  The  fact  that  money  is  a  commodity,  differing 
in  only  a  few  respects  from  other  commodities  in  the 
market,  has  led  some  economists  to  endeavor  to  wipe  out 
the  distinction  between  the  money  market  and  the  market 
for  capital.2  But  looking  to  the  function  of  money  as  a 
tool,  like  a  freight-car  or  a  canal,  it  is  apparent  that  the 
movements  of  money  may  be  distinct  from  the  movements 
of  capital.  In  other  words,  there  might  be  a  demand  for 
the  tools  of  exchange  when  there  was  a  surplus  of  the 
objects  of  exchange,  or  there  might  be  a  surplus  of  the 
tools  when  there  was  a  scarcity  of  the  objects  of  exchange. 

The  value  of  money  fixed  by  the  discount  rate  in  any 
market  is  the  index  of  its  marginal  utility  there.  Higher 
discount  rates  in  another  market  indicate  that  money 
as  such  has  a  higher  utility  there,  and  they  attract  it  from 
the  market  where  its  utility  is  small.  Low  discount  rates 
indicate  that  money  has  a  low  degree  of  utility  in  a  given 
market  in  relation  to  the  supply.  It  is  the  surplus  on  the 


1  Mongin  points  out  the  absurdity  of  the  cruder  view  of  the 
quantity  theory  in  the  observation:   "It  logically  follows  that 
periods  of  commercial  activity  are  of  a  nature  to  lead  to  a  fall  of 
prices,  while  periods  of  crises,  when  exchanges  are  few,  when  all 
industrial   life   relaxes,   should   coincide   with   a  general   rise   of 
prices — which  is  precisely  the  contrary  of  the  reality." — Revue 
d'Economie  Politique  (February,  1897),  XI.,  p.  150. 

2  Leroy-Beaulieu,   for  instance,   has  deliberately  adopted   the 
title  "Market  for  available  capital"  (March6  des  capitaux  dis- 
pombles),  as  caption  of  one  of  the  departments  of  L'Economiste 
Francois,  instead  of  the  expression,  "The  Money  Market,"  used 
in  j»«ist  English  journals. 

174 


THE    VALUE    OP    MONEY 

margin  of  supply  which  fixes  the  rate  for  the  entire  stock. 
When  the  surplus  of  a  community  consists  not  only  of 
money,  but  of  capital,  the  transfer  of  the  surplus  to  an- 
other community  takes  place  in  goods  as  well  as  gold. 
But  there  may  be  a  scarcity  of  money  in  relation  to  the 
demand  when  there  is  a  surplus  of  capital,  and  the  rate 
for  permanent  loans  has  not  changed.  A  flurry  upon  the 
stock  exchange,  which  creates  a  sudden  demand  for 
money  at  a  high  rental  value,  does  not  involve  change  in 
the  permanent  rates  for  the  loan  of  capital,  except  so  far 
as  the  high  rate  for  money  may  afford  the  temptation  to 
the  capitalist  to  convert  his  savings  into  money  instead  of 
keeping  them  in  other  forms  of  capital.1 

We  have  seen  that  the  value  of  money  is  governed  by 
the  principle  of  demand  and  supply,  but  by  a  somewhat 
different  process  from  that  usually  assigned  to  this  prin- 
ciple by  advocates  of  the  quantity  theory.  The  side 
of  demand  has  been  chiefly  dealt  with,  because  demand 
for  money  is  more  variable  and  therefore  more  influential 
upon  its  value,  over  short  intervals  at  least,  than  changes 
in  supply.  Changes  in  the  supply  of  money  have  an 
influence,  however,  which  is  felt  under  certain  conditions. 
It  might  be  said  of  wheat,  as  it  is  said  of  money,  that  its 
value  varies  inversely  to  the  supply,  if  by  this  is  meant 
only  that  an  increase  in  supply  tends  to  diminish  the 
value  of  the  single  unit  and  a  decrease  in  supply  tends 
to  increase  the  value  of  the  unit.  But  neither  in  regard 
to  wheat  nor  in  regard  to  money  is  there  a  definite  mathe- 
matical relation  between  an  increase  in  demand  and  a 
given  supply.  It  is  the  supply  on  the  margin  which  tends 
to  fix  the  price  for  the  entire  stock.  A  slight  deficiency 

1  "If  the  rate  of  discount  rises,  the  holders  of  shares,  bonds, 
stock,  and  other  interest-bearing  securities  will  find  it  profitable 
to  employ  their  money  in  discounting  bills  rather  than  in  holding 
the  former.  Hence  sales  will  take  place,  with  the  result  of  send- 
ing down  the  prices  of  securities." — Pantaleoni,  Pure  Economics, 
p.  236. 

175 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

in  the  supply  of  wheat  will  send  the  price  up  by  a  large 
percentage;1  and  likewise  a  slight  deficiency  of  money 
will  cause  a  marked  advance  in  rates  charged  for  its  use 
and  a  fall  in  the  price  of  securities,  which  represent  the 
command  of  money  over  the  most  sensitive  form  of  com- 
modities. 

These  facts  bring  into  relief  the  real  factor  in  fixing 
the  relative  value  of  money  and  of  other  articles.  This 
factor  is  the  intensity  of  demand.  Intensity  of  demand 
is  not  governed  by  the  rules  of  arithmetical  progression. 
The  man  who  needs  a  loaf  of  bread  does  not  offer  to  pay 
a  price  ten  per  cent,  higher  because  the  supply  has  fallen 
ten  per  cent.,  if  that  fall  reduces  the  available  stock  below 
the  amount  necessary  to  feed  the  community.  On  the 
contrary,  he  stands  ready  to  advance  his  price  by  much 
more  than  ten  per  cent.  The  value  of  money  as  expressed 
by  the  discount  rate  does  not  vary  in  mathematical  ratio 
to  changes  in  the  supply.  It  varies  more  nearly  in  the 
ratio  of  the  changes  on  the  margin  between  plenty  and 
scarcity.  If  the  reserves  of  the  New  York  banks  fall 
from  $200,000,000  to  $160,000,000,  discount  rates  do  not 
advance  merely  by  twenty  per  cent,  as  from  two  per  cent, 
to  2.40;  they  tend  rather  to  advance  in  the  ratio  of  the 
intensity  of  demand  for  money.  If  reserves  in  the  first 
case  were  $20,000,000  in  excess  of  legal  requirements, 
and  were  reduced  in  the  second  case  $20,000,000  below 

1  "The  average  price  of  wheat  (per  quarter)  in  the  decade 
1771-80,  in  which  Adam  Smith  wrote,  was  345.  yd.;  in  1781-90  it 
was  375.  id.;  in  1791-1800  it  was  635.  6d.;  in  1801-10  it  was  835. 
i  id." — Marshall,  p.  254,  note.  If  these  great  differences  are  to 
be  ascribed  in  part  to  lack  of  means  of  transportation,  they  are 
nevertheless  almost  paralleled  by  the  fluctuations  of  modern  times. 
Thus  the  average  farm  price  of  wheat  per  bushel  in  the  United 
States  was  50.9  cents  in  1895  and  72.6  cents  in  1896 — an  advance 
of  more  than  forty  per  cent.;  but  the  decline  in  production  was 
only  from  467,102,947  bushels  to  427,684,346  bushels,  or  less  than 
ten  percent. — Year  Book  of  the  Department  of  Agriculture,  1899, 
p.  760. 

176 


THE  VALUE  OF  MONEY 

legal  requirements,  rates  of  discount  would  be  more  likely 
to  advance  by  100  per  cent,  (as  from  three  to  six  per  cent.) 
than  in  the  mathematical  ratio  of  twenty  per  cent.  Al- 
though Walras  does  not  grasp  the  full  significance  of  his 
own  language,  he  approximates  the  true  principle  of  the 
value  of  money  in  the  declaration  that  "the  relations  of 
value  or  of  prices  are  mathematically  equal  to  the  inten- 
sities of  the  last  needs  satisfied  (or  of  rarities)  for  each 
consumer."  * 

Since  this  rule  is  of  general  application  to  commodities 
(including  money),  it  follows  that  differing  intensities  of 
demand  for  different  articles  will  affect  their  prices  in 
different  degrees  under  changing  conditions.  A  decreas- 
ing rarity  of  money  due  to  an  increase  of  supply  (without 
corresponding  increase  of  demand)  will  change  its  re- 
lationship to  other  articles;  but  the  new  relationship  es- 
tablished will  conform  to  the  intensity  of  demand  for 
other  articles,  and  will  not  leave  such  articles  in  exactly 
the  original  ratio  of  value  among  themselves.  The  in- 
tensity of  demand  for  money,  indicated  by  its  relations  to 
other  articles,  operates  upon  the  supply  by  diminishing 
the  employment  of  the  metals  in  the  arts  when  the  metals 
are  scarce,  thereby  increasing  the  amount  available  for 
money,  and  by  increasing  their  employment  in  the  arts 
when  they  are  plentiful,  thereby  diminishing  the  amount 
turned  into  money.  At  this  point,  therefore,  emerges  the 
influence  of  cost  of  production  upon  the  quantity  and  the 
exchange  value  of  the  precious  metals. 

Ricardo  laid  down  the  rule  that  "gold  and  silver,  like 
all  other  commodities,  are  valuable  only  in  proportion  to 
the  quantity  of  labor  necessary  to  produce  them,  and  bring 
them  to  market."2  This  rule,  that  value  is  determined 
by  cost  of  production,  must  in  the  end  affect  the  produc- 
tion of  any  commodity,  but  is  a  rule  of  much  slower  and 
less  traceable  working  in  the  case  of  money  than  with 

1  Etudes  d' Economic  Politique  Appliqute,  p.  5. 
1  Principles  of  Political  Economy,  p.  340. 

'-»  177 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

other  articles.  The  immediate  exchange  value  of  articles 
in  the  market  is  determined  by  demand  and  supply.  In 
the  language  of  an  English  student  of  monetary  prob- 
lems : * 

"The  position  of  a  commodity  in  the  scale  of  value  is 
the  outcome  of  a  comparison  between  the  demand  for  it 
and  its  supply.  Which  of  the  two  contributes  the  larger 
share  to  its  value  depends,  chiefly,  upon  the  nature  of  the 
commodity.  The  value  of  a  perishable  commodity,  such, 
for  example,  as  fish,  or  even  grain,  the  demand  for  which 
varies  within  narrow  limits,  fluctuates  in  prompt  accord 
with  the  fluctuations  of  the  supply.  When,  like  the 
precious  metals,  a  commodity  is  practically  imperishable, 
its  stores  act  as  a  distributing  reservoir,  and  its  value 
fluctuates  with  the  level  of  the  reservoir,  and  is  but  slight- 
ly, if  at  all,  affected  by  the  supply,  the  volume  of  which 
bears  a  constantly  diminishing  proportion  to  the  reservoir 
which  it  feeds.  In  these  cases  it  is  the  demand  which 
chiefly  governs  the  value,  the  supply  being  always  an 
offer,  and,  under  ordinary  circumstances,  practically  free 
from  fluctuations." 

Cost  of  production  becomes  a  factor  in  determining 
value  when  the  supply  of  any  article  becomes  so  far  ex- 
cessive as  to  reduce  the  value  in  exchange  below  the  cost 
of  production.  Production  may  then  be  arrested  and 
the  supply  reduced,  with  the  ultimate  effect  of  raising  the 
exchange  value  of  the  supply  in  the  market.  This  time 
comes  in  the  case  of  gold  and  silver  when  the  increased 
cost  of  machinery  and  labor  make  unprofitable  the  ex- 
traction of  the  precious  metals  from  the  poorer  mines. 
Such  mines  may  then  be  abandoned  and  production 
diminished.  Production  will  be  stimulated  again  as  dim- 
inution of  the  supply  makes  it  unequal  to  the  demand 

1  Memorandum  by  R.  B.  Chapman,  C.S.I.,  Secretary  to  the 
Government  of  India  in  the  Department  of  Finance  and  Com- 
merce, submitted  to  the  Indian  Currency  Committee. — Fifty- 
third  Congress,  Sen.  Misc.  Doc.  No.  23,  p.  650. 

I78 


THE  VALUE  OF  MONEY 

and  raises  the  marginal  value  as  expressed  through  the 
discount  rate  or  through  prices. 

If  gold  is  rising  in  value  in  proportion  to  other  articles 
which  are  in  demand,  then  what  is  produced  will  exchange 
for  more  of  these  other  articles.  Hence  will  come  a  stim- 
ulus to  production  up  to  the  point  where  comparative 
equilibrium  will  be  restored.1  Hadley  well  expresses 
the  truth  on  the  subject  when  he  says  that,  under  a 
system  of  free  coinage  of  the  standard  metal,  changes  in 
the  quantity  of  money  "are  at  once  a  cause  and  an  effect 
of  changes  in  general  price  level.  If  we  have  to  choose  be- 
tween the  two  ways  of  looking  at  the  matter,  there  is  in 
the  majority  of  cases  less  error  in  treating  them  as  an 
effect  than  as  a  cause.  The  amount  of  production  and 
coinage  of  gold  is  so  far  affected  by  changes  in  the  general 
price  level  that  it  tends  to  adapt  the  supply  of  money 
to  the  demand  and  mitigates  changes  in  general  prices 
far  oftener  than  it  causes  them."2 

In  a  rough  sense,  changes  in  the  volume  of  money  are 
related  to  changes  in  prices  of  other  articles;  but,  even 
under  conditions  as  nearly  static  as  is  conceivable,  the  time 
could  never  arise  when  there  would  be  a  general  change 
of  prices  bearing  a  definite  ratio  to  changes  in  the  volume 
of  money.  Changes  in  the  ratio  of  supply  and  demand, 
and,  therefore,  in  the  marginal  utility  of  one  article  in 
relation  to  all  others,  must  continually  interact  upon  the 
demand  for  gold.  The  demand  for  gold  would  be  in  some 
degree  the  resultant  of  the  interaction  of  the  marginal 
utility  of  other  articles;  but  no  period  of  transition,  how- 
ever long,  and  no  system  of  averaging  prices,  however 
complete,  could  ever  demonstrate  that  the  prices  of  all 
articles  had  changed  between  any  two  dates  in  any  defi- 
nite ratio  to  the  stock  of  gold. 

1  "  If  the  amount  of  gold  for  which  a  hat  will  exchange  is  less 
than  the  amount  of  gold  which  could  be  produced  by  the  work 
which  produced  the  hat,  gold  will  be  produced  until  an  equilibrium 
is  reached." — Davenport,  p  238.  *  Economics,  p.  ig8. 


Ill 

HOW   CREDIT    INFLUENCES    THE   VALUE    OF 
MONEY 

Introduces  new  complications  into  the  quantity  theory — Credit 
instruments  largely  the  product  of  transactions — How  foreign 
banking  credits  provide  a  medium  of  exchange  without  move- 
ment of  gold — Discount  rates  not  uniformly  dependent  upon 
stock  of  metallic  money — How  changes  in  conditions  of  credit 
may  offset  changes  in  money  supply — The  marginal  demand 
for  gold  to  settle  balances. 

IT  has  been  found  convenient,  in  discussing  the  prin- 
ciples by  which  the  value  of  money  is  determined,  to 
proceed  at  first  substantially  on  the  assumption  that 
money  consists  of  gold,  and  that  changes  in  the  quantity 
of  gold  in  a  community  react  directly  upon  prices  of  other 
commodities  than  gold.  With  the  introduction  of  other 
forms  of  currency  and  also  of  credit  which  is  not  in  the 
form  of  currency,  new  factors  are  brought  into  the  problem. 
A  mass  of  currency  results,  consisting  of  gold  and  paper 
together,  whose  aggregate  movements  are  influenced  by 
economic  changes  in  much  the  same  manner  as  the  move- 
ment of  gold  would  be  influenced,  if  it  were  the  sole 
medium  of  transactions;  but  by  the  introduction  of  the 
new  factor  the  direct  relationship  between  gold  and  other 
commodities  is  more  or  less  modified  and  obscured.  It  re- 
mains true  under  the  most  complicated  forms  of  the 
modern  credit  system  that  radical  changes  in  the  supply 
of  gold  will  react  finally  upon  the  prices  of  some  com- 
modities, but  the  credit  system  makes  this  reaction  at 
once  more  complicated  and  less  direct  than  if  no  such  in- 
termediary came  between  gold  and  goods. 

180 


CREDIT  AND  THE  VALUE  OF  MONEY 

The  form  of  credit  which  is  most  directly  sensitive  to 
changes  in  the  quantity  of  gold  is  that  which  takes  the 
form  of  currency — whether  government  notes,  bank-notes, 
or  token  coins.  It  was  formerly  supposed  that  these 
forms  of  credit — falling  within  the  popular  definition  of 
"money" — responded  almost  automatically  to  changes  in 
the  volume  of  gold,  because  such  forms  of  credit  were  pro- 
tected by  definite  reserves  of  gold.  Modern  methods  of 
converting  capital  into  negotiable  credit  have,  however, 
been  so  multiplied  and  are  so  interlaced  one  with  the 
other  that  great  variations  may  occur  in  the  quantity 
of  credit  extended  by  banks  and  trust  companies  without 
corresponding  variations  in  the  quantity  of  gold  held  as 
reserves.  This  fact  imposes  caution  upon  attempts  to 
argue  from  changes  in  the  quantity  of  money  to  changes 
in  prices  or  from  changes  in  prices  to  changes  in  the 
quantity  of  money.  Three  propositions  may  be  laid 
down  on  this  head  as  modifying  the  tendency  towards  an 
exact  ratio  between  gold  and  prices : 

First,  that  changes  in  the  quantity  of  gold  in  a  com- 
munity do  not  cause  exactly  corresponding  changes  in  the 
quantity  of  currency. 

Second,  that  changes  in  the  quantity  of  currency  do  not 
cause  exactly  corresponding  changes  in  the  quantity  of 
other  forms  of  credit. 

Third,  that  changes  in  the  quantity  of  currency  or  of 
all  forms  of  credit  are  not  accompanied  by  exactly  cor- 
responding changes  in  prices  of  commodities. 

A  variety  of  forms  of  credit  have  taken  the  place  of  gold 
as  a  medium  of  exchange  in  commercial  countries  and  have 
thereby  greatly  economized  its  use.  With  certain  reserva- 
tions, these  forms  of  credit  may  be  considered  as  complete 
substitutes  for  gold.  As  such  substitutes,  they  change  the 
relation  which  would  exist  between  money  and  commodities 
if  the  entire  work  of  exchange  were  imposed  upon  gold.  As 
Pantaleoni  declares:1 

1  Pure  Economics,  p.  240. 
181 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

"The  law  of  the  value  of  instruments  of  credit  comes  to 
be,  that  every  such  instrument  is  worth  as  much  as  the 
money  for  which  it  is  substituted,  and  whose  value  it 
has  reduced  below  the  level  it  would  attain,  if  no 
instruments  of  credit  were  in  circulation  as  a  medium  of 
exchange." 

Ultimately  the  value  of  substitutes  for  gold  depends 
upon  gold.  They  cannot  retain  a  fixed  value  in  gold 
unless  they  are  exchangeable  for  it.  Hence  a  definite 
relation  has  been  assumed  between  substitutes  for  gold 
and  the  amount  of  metal  held  in  reserves.  In  most  coun- 
tries, however,  even  an  approach  to  definite  relationship 
of  this  sort  exists  only  between  gold  and  those  forms  of 
credit  which  are  used  as  currency.  Other  forms  of  cred- 
it, like  deposits,  checks,  bills  of  exchange,  and  clearings, 
operate  to  economize  the  use  of  money  without  having 
any  definite  relationship,  fixed  by  either  law  or  custom,  to 
the  stock  of  gold.  These  forms  of  credit,  however,  do  not 
differ  greatly  from  those  which  circulate  as  currency.1 
They  are,  in  effect,  promises  to  pay  gold  on  demand,  and 
it  is  the  business  of  bankers  to  see  that  the  stock  of 
gold  does  not  become  too  attenuated  in  relation  to 
such  promises.  It  is  not  the  absence  of  such  relation- 
ship which  it  is  sought  to  establish  here,  but  the  ex- 
tremely wide  limits  within  which  the  volume  of  gold  on 
the  one  hand  or  of  credit  on  the  other  hand  may  vary 
without  producing  any  obvious  influence  on  the  other 
factor.2 

The  bank-note,  as  we  shall  have  occasion  to  see  here- 
after, becomes,  when  its  credit  is  well  established,  so 

1  "  Deposits  should  be  regarded  as  bank-notes.  They  are  some- 
times not  inaptly  termed  '  notes  belonging  to  the  public  and  held 
by  the  bank  at  the  disposal  of  their  owners.' " — Pierson,  I.,  p.  395. 

J  Laughlin  declares:  "The  absolute  increase  of  demand  for 
gold  arising  from  keeping  the  same  percentage  of  an  increasing 
quantity  of  deposits  is  so  insignificant  compared  with  the  total 
world's  supply  of  gold,  as  to  be  disregarded." — Principles  of 
Money,  I.,  p.  128. 

183 


CREDIT  AND  THE  VALUE  OF  MONEY 

complete  a  substitute  for  gold  that  its  movements  are 
far  from  following  those  of  the  gold  stock  either  up  or 
down.  As  Nogaro  points  out:1 

"The  credit  circulation  is  capable  of  varying  in  a 
certain  measure,  independently  of  the  metallic  stock. 
From  this  observation  may  be  deduced,  as  an  incident, 
that  these  variations  may  take  place  in  an  opposite  di- 
rection from  those  of  the  metallic  stock  and  in  conse- 
quence may,  in  a  certain  measure,  neutralize  their  ef- 
fects. Thus,  when  foreign  trade  causes  a  country  to  lose 
a  certain  amount  of  metallic  money,  this  loss  may  be 
compensated  by  issues  of  notes  or  by  perfecting  the  clear- 
ing system." 

Theoretically  a  definite  relationship  exists  when,  as 
in  the  case  of  the  national,  banks  of  the  United  States, 
fixed  reserves  are  required  against  deposits.  The  Na- 
tional Banking  Act  prohibits  any  national  bank  from 
making  a  loan  or  declaring  a  dividend  after  its  reserve 
has  fallen  below  the  legal  limit.  In  theory,  therefore, 
an  export  of  gold  derived  from  the  reserves  of  the  New 
York  banks  should  be  followed  by  a  contraction  of  four 
times  the  amount  in  deposits,  but,  practically,  the  re- 
lation cannot  be  established  mathematically,  because  the 
proportion  of  reserves  is  constantly  changing,  is  usually 
in  excess  of  legal  requirements  (although  sometimes  be- 
low it),  and  because  deposits  are  kept  by  trust  com- 
panies, State  banks,  and  other  institutions  which  are  not 
governed  by  the  same  reserve  laws.  Such  institutions, 
in  many  cases,  keep  large  deposits  with  national  banks 
which  maintain  metallic  reserves,  and  there  results  from 
this  system  a  duplication  of  the  credit  secured  by  the 
reserves,  which  permits  great  elasticity  in  expanding 
and  contracting  credit  and  makes  it  practically  impossi- 
ble to  deduce  any  fixed  mathematical  relation  between 
credits  and  gold.2 

1  Le  Role  de  la  Monnaie,  p.  136. 

2  Thus  the  specie  reserves  of  the  New  York  Clearing -House 

183 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

Even  more  striking  is  the  duplication  of  credits  in  Eng- 
land. The  Bank  of  England  is  there  the  centre  or  ful- 
crum of  the  entire  system  of  banking  credit.  Other  banks 
treat  deposits  in  the  Bank  of  England  and  even  money 
lent  on  call  as  cash.1  Changes  in  the  amount  of  credit 
are  influenced  by  changes  in  the  reserve  of  the  Bank  of 
England,  just  as  in  the  United  States  they  are  influenced 
by  the  reserves  of  the  national  banks  of  New  York. 
The  principal  joint-stock  banks  in  England  keep  their 
reserves  in  the  form  of  deposits  with  the  Bank  of  England, 
while  the  country  banks  in  their  turn  keep  their  reserves 
in  the  form  of  deposits  with  the  joint-stock  banks.  Thus 
one  credit  is  superimposed  upon  the  other,  so  as  to  con- 
stitute, in  the  opinion  of  some  critics,  an  inverted  pyra- 
mid with  a  very  unstable  foundation.  Whether  this  is  so 
or  not,  it  is  obvious  that  with  such  variations  in  system 
and  with  such  duplication  of  credit  as  exist  in  the  United 
States  and  in  England,  there  can  be  no  mathematical 
ratio  established  between  the  amount  of  credit  and  the 
amount  of  gold. 

These  facts  are  cited  to  show  how  complicated  is  the 
relationship  between  gold  and  credit  under  modern 
conditions,  and  how  difficult  it  would  be  to  seek  to  ascer- 

banks  stood  for  the  week  ending  June  25,  1904,  at  $240,368,300, 
as  against  a  similar  item  for  the  week  ending  June  27,  1903,  of 
$163,770,200.  With  this  increase  of  nearly  50  per  cent  in  specie, 
loans  increased  only  about  17  per  cent,  (from  $913,746,900  to 
$1,066,813,200)  and  deposits  about  26  percent,  (from  $903,719,- 
800  to  $1,143,314,100),  while  the  prices  of  commodities  showed  a 
declining  tendency.  Net  circulation  of  money  per  capita  through- 
out the  United  States  increased  only  from  $29.42  on  June  30, 
1903,  to  $30.80  on  June  30,  1904.  These  figures  go  to  show  that 
changes  in  bank  reserves  do  not  react  promptly  and  directly  upon 
gold  employed  as  a  medium  of  exchange,  and  that  the  movement 
of  prices  may  be  in  the  opposite  direction  from  that  of  the  amount 
of  bank  reserves. 

1  "Cash  in  hand  and  money  at  call  are  two  very  incongruous 
items,  but  in  most  of  the  balance  -  sheets  they  are  lumped  to- 
gether."— London  Economist  (October  17.  1903),  LXL,  p.  1749- 

184 


CREDIT   AND    THE    VALUE    OF    MONEY 

tain  a  definite  relationship  between  the  quantity  of  gold 
and  prices  at  any  two  different  dates  in  the  same  country 
or  in  different  countries.  Because  of  the  confusing 
factors  introduced  by  instruments  of  credit  used  to  effect 
exchanges,  it  would  be  necessary  to  modify  the  factors 
of  the  problem  by  what  may  be  called  the  method  of 
exclusion  or  of  inclusion — either  by  eliminating  from  the 
problem  the  influence  of  other  forms  of  currency  or  by  in- 
cluding them  in  such  calculations. 

It  was  believed  at  one  time,  and  has  been  maintained 
by  certain  writers  in  modern  times,  that  if  all  forms  of 
currency  were  taken  into  account,  a  quantitative  relation 
could  be  established  between  such  currency  and  prices. 
But  in  view  of  the  great  volume  of  transactions  carried  on 
by  other  forms  of  credit,  like  checks  upon  deposit  accounts 
and  book  accounts,  it  becomes  clear  that  the  necessary 
elements  of  the  problem  cannot  be  isolated  so  as  to  set  all 
forms  of  currency  over  against  the  movement  of  goods. 
Equally  impracticable  would  it  be  to  narrow  the  problem 
by  eliminating  transactions  in  which  actual  gold  was  not 
employed,  and  seeking  to  establish  a  mathematical  ratio 
between  the  quantity  of  money  and  prices  or  the  quantity 
of  gold  and  prices. 

To  contend  that  the  volume  of  wholesale  transactions 
settled  by  checks  did  not  influence  prices  expressed  in 
money,  but  that  such  prices  were  determined  by  the 
small  number  of  transactions  in  which  money  passed, 
would  be  almost  a  reductio  ad  absurdum.  It  is  the  de- 
mand for  particular  goods  which  determines  their  price; 
it  is  the  relation  of  these  goods  to  others  which  is  ex- 
pressed by  their  relative  prices.  The  various  forms  of 
credit  growing  out  of  such  relations  may  change  great- 
ly in  amount  without  any  corresponding  change  in  the 
amount  of  gold.  Such  a  change,  moreover,  in  the  volume 
of  credit  instruments  may  take  place  without  any  corre- 
sponding change  in  price. 

When  changes  of  prices  accompany  changes  in  the 

185 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

volume  of  credit,  the  former  are  more  likely  to  be  the 
cause  of  the  latter  than  the  latter  the  cause  of  the  former. 
This  results  inevitably  from  the  fact  that  credit  instru- 
ments are  often  created  by  the  exchange  of  goods.  A 
manufacturer  who  wishes  to  buy  raw  material  makes 
application  to  his  bank  for  a  loan.  The  loan  might  be 
made  by  handing  him  gold  or  by  handing  him  bank- 
notes. In  the  latter  case,  a  demand  for  gold  would  not 
be  involved  unless  the  bank  had  already  issued  notes  to 
the  maximum  amount  allowed  against  its  existing  re- 
serve. The  usual  processs  of  making  such  a  loan,  how- 
ever, is  neither  by  gold  nor  by  bank-notes.  It  is  by  cred- 
iting the  borrower  with  a  deposit.  Against  this  he  may 
indeed  draw  checks,  calling  for  gold,  but  such  checks  are 
likely  to  be  deposited  in  the  same  bank  by  those  to  whom 
they  are  drawn  or  to  be  balanced  at  the  clearing-house 
against  other  checks  placed  in  the  hands  of  the  bank  for 
collection. 

The  operation  of  transferring  the  raw  materials  from 
the  owner  to  the  manufacturer  would  thus  be  accom- 
plished without  the  use  of  either  gold  or  other  forms  of 
currency.  It  would  itself  cause  the  creation  of  instru- 
ments of  credit  and  their  final  extinction,  instead  of 
being  influenced  by  the  quantity  of  such  instruments 
previously  in  circulation.  The  mechanism  of  such  trans- 
actions would  justify  the  analysis  of  Lord  Farrer:1 

"As  business  increases  credit-money  increases,  and  if 
the  effect  of  increasing  business  is  to  raise  prices,  and 
thus  to  require  an  additional  quantity  of  media  of  ex- 
change, credit  increases  in  proportion,  and  the  additional 
media  are  at  once  forthcoming.  Thus  the  quantity  of 
money  in  use  at  any  given  time  depends  on  business,  and 
not  business  on  money.  It  is  business  which  creates 
money,  and  not  money  which  creates  business." 

1  Studies  in  Currency,  1898,  p.  182.  Lord  Farrer  in  this  passage 
uses  the  word  "money"  as  synonymous  with  currency  and  even 
wjth.  banking  credits. 

186 


CREDIT  AND  THE  VALUE  OF  MONEY 

Not  only  may  credit  be  greatly  expanded  without  calling 
for  an  increase  in  the  stock  of  gold,  but  conversely  there 
may  be  an  increase  in  the  stock  of  gold  without  a  corre- 
sponding expansion  of  credit.  When  a  quantity  of  new 
gold  enters  a  community  already  fairly  well  equipped 
with  a  medium  of  exchange  it  is  apt  to  find  a  resting- 
place  in  bank  reserves.  Whether  it  shall  be  soon  availed 
of  as  a  basis  for  increasing  loans  depends  upon  the  condi- 
tion of  credit.  If  there  is  little  demand  for  increased 
credit,  the  new  gold  may  lie  for  a  long  time  in  reserves, 
and  eventually  be  exported  without  any  visible  effect  in 
raising  prices.  Something  of  this  kind  occurred  in  Eng- 
land, when  the  gold  product  of  South  Africa  began  to 
reach  London  in  large  amounts.  From  the  end  of  De- 
cember, 1894,  to  January  i,  1896,  the  coin  and  bullion 
in  the  Bank  of  England  rose  from  £32,547,000  to  £44,- 
960,056.  This  was  an  increase  of  more  than  thirty-five 
per  cent.,  but  prices  of  commodities,  as  measured  by 
Sauerbeck,  were  lower  in  1895  than  in  1894  and  lower  in 
1896  than  in  1895. 

The  simple  truth,  which  has  so  often  confounded  the 
advocates  of  the  quantity  theory  in  its  cruder  form,  is 
that  prices  are  much  more  influenced  by  the  state  of 
industry  and  of  credit  than  by  the  supply  of  the  precious 
metals.  If  there  has  been  overproduction  of  certain 
commodities  beyond  effective  demand  for  them,  a  sud- 
den influx  of  new  gold  will  not  restore  equilibrium.  At 
such  times  of  depression  there  is  usually  more  than 
enough  gold  in  bank  vaults  for  current  demands;  and 
there  is  still  more  idle  capital  in  the  form  of  banking 
credits  awaiting  investment,  but  hesitating  from  lack  of 
confidence  to  accept  the  investments  on  the  market. 
The  influence  of  the  influx  of  new  gold  upon  a  depressed 
market  would  be  governed  as  much  by  the  exact  point 
which  had  been  reached  in  revival  of  confidence  as  by 
the  quantity  of  new  gold.  If  the  collapse  of  credit  had 
just  taken  place  and  the  period  of  prostration  had  only 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

begun,  the  new  gold  would  have  little  influence  in  re- 
viving activity,  because  it  could  not  restore  the  shattered 
equilibrium  between  effective  demand  and  supply  of 
commodities.  If,  however,  the  influx  of  new  gold  came 
when  the  period  of  depression  was  nearing  its  close,  and 
industry  were  on  the  eve  of  revival,  the  new  gold  might 
add  a  factor  to  the  impulse  of  reviving  activity.  To 
this  extent  changes  in  the  quantity  of  gold  act  upon 
prices  in  the  manner  set  forth  by  Andrew:1 

"While,  then,  there  is  a  measure  of  elasticity  in  the 
credit  currency,  so  that  in  every  cycle  of  trade  there  are 
fluctuations  in  the  monetary  supply  that  do  not  reflect 
themselves  in  the  amount  of  credit,  nevertheless  the 
quantity  of  money  held  by  the  banks  sets  a  limit  beyond 
which  credit  cannot  be  extended,  and  in  the  course  of 
every  cycle  this  limit  is  actually  reached.  In  the  long 
run,  as  apart  from  the  cyclic  oscillations,  the  quantity  of 
banking  credit  is  governed  by  the  quantity  of  money,  and 
each  permanent  addition  to  the  monetary  supply  tends  in 
the  end  towards  an  increase  of  credit." 

The  increase  in  the  reserves  of  the  Bank  of  England 
from  1889  to  1896  was  more  than  125  per  cent.,  and  if 
the  quantity  theory  had  been  operative  in  its  crudest 
form  there  must  have  been  an  advance  in  prices  in  Great 
Britain  which  would  have  convulsed  industry  and  doubled 
the  cost  of  living.  But,  in  fact,  nothing  of  the  kind  oc- 
curred. Index  prices,  so  far  as  they  afford  a  guide, 
were  less  by  more  than  ten  per  cent,  in  1896  than  in  1889. 
The  new  gold,  instead  of  causing  a  revolution  in  British 
finance,  simply  filtered  through  the  channel  of  the  Bank 
of  England  to  countries  where  it  was  more  needed  as  a 
tool  of  exchange.  Japan  was  about  adopting  the  gold 
standard ;  Russia  was  increasing  her  accumulation  of  the 
precious  metals  for  the  same  purpose;  and  the  United 
States  were  regaining  a  position  of  monetary  solvency 

*  Proceedings  of  the  American  Economic  Association  (1904), 
p.  114. 

188 


CREDIT    AND    THE    VALUE    OF    MONEY 

after  their  long  debauch  with  silver.  These  countries 
needed  the  gold  as  a  commodity  to  increase  their  tools 
of  exchange  and  their  reserve  funds.  They  took  it  from 
Great  Britain,  not  because  they  were  richer  or  more  pow- 
erful than  she,  but  because  the  marginal  utility  of  gold 
was  greater  to  them  than  it  was  to  her  with  her  already 
sufficient  gold  currency.  Great  Britain  had  more  use 
for  the  grain,  silks,  and  machinery  of  other  countries  than 
she  had  for  the  gold  produced  by  her  dependencies,  and 
she  accordingly  made  the  exchange  according  to  the 
marginal  utility  of  gold  or  of  other  goods  to  the  various 
contracting  parties. 

In  the  United  States  the  stock  of  gold  money  increased 
by  more  than  100  per  cent,  from  1896  to  1903,  and  the 
total  stock  of  money  increased  by  nearly  fifty  per  cent. 
Prices  of  commodities  advanced  considerably  during  this 
period,  but  in  no  such  ratio  as  the  increase  in  the  quantity 
of  money.  Upon  the  whole  the  banks  absorbed  consider- 
ably more  than  their  proportion  of  the  new  gold,  but 
absorbed  much  more  from  1897  to  1899  than  during  later 
years.  Notwithstanding  the  increase  in  the  stock  of 
money  from  year  to  year,  the  demand  for  its  use  outside 
the  banks  was  so  great  as  to  leave  a  decreasing  proportion 
to  be  added  to  bank  reserves.  Loans  and  deposits  in- 
creased until  in  1903,  when  there  came  a  fall  of  prices  for 
securities  and  an  arrest  in  the  upward  movement  of  com- 
modity prices. 

At  first  blush  it  might  seem  that  this  result  was  a 
demonstration  of  the  relation  of  prices  to  the  stock  of 
money.  The  question  at  issue,  however,  is  not  whether 
the  stock  of  money  kept  pace  with  the  demand  for  it,  but 
whether  changes  in  the  supply  of  money  were  in  them- 
selves the  causes  of  changes  of  prices.  It  is  undeniable 
that  periods  of  industrial  activity  increase  the  demand  for 
currency  and  in  most  cases  the  demand  for  standard 
money.  But  the  variations  in  the  prices  of  goods  do  not 
follow  with  any  regularity  the  variations  in  the  stock  of 

189 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

standard  money,  because  elasticity  is  given  to  the  mone- 
tary system  by  the  use  of  various  forms  of  credit.  The 
employment  of  credit  in  a  large  proportion  to  metallic 
money  may  be  compared  to  the  stretching  of  a  rubber 
band ;  periods  of  diminished  credit  to  the  relaxation  of  the 
band.  The  length  to  which  the  band  is  stretched  will 
afford  no  definite  indication  of  the  amount  of  rubber  which 
it  contains.  Even  if  it  were  admitted  in  theory,  with 
Dechesne,1  that  the  apparent  changes  in  the  value  of 
money  over  ten-year  periods  were  due  to  variations  in 
credit,  while  the  changes  over  longer  periods  were  due  to 
changes  in  the  quantity  of  standard  money,  it  would  re- 
main true  that  no  safe  rule  could  be  framed  for  separat- 
ing the  one  source  of  variation  definitely  from  the  other 
and  thereby  determining  by  prices  the  real  variations 
in  the  value  of  standard  money  due  to  changes  in  its 
quantity. 

Rising  prices  and  increasing  stocks  of  money  are  in- 
cidents of  periods  of  industrial  activity,  but  they  are  rather 
manifestations  of  the  effects  of  common  causes  than  one 
the  effect  of  the  other,  and  it  is  far  from  being  the  case 
that  one  bears  a  fixed  relation  to  the  other.  Some  of  the 
reasons  for  an  increase  at  such  times  in  the  demand  for 
money  are  well  set  forth  by  Sprague:2 

"During  a  period  of  economic  activity,  employment  is 
more  general  and  regular;  and,  even  though  the  rate  of 
wages  is  at  first  unchanged,  a  larger  total  goes  to  the  non- 
check-using  classes  in  the  community.  A  greater  amount 
of  purchasing  power  is  at  their  disposal ;  and  that  necessi- 
tates the  withdrawal  of  a  larger  amount  of  money  from 
the  banks,  either  in  the  form  of  bank-notes  or  of  the  vari- 
ous kinds  of  money  which  can  be  counted  as  bank  reserve. 
As  prosperity  is  diffused,  numbers  of  people  enter  the 

1  "  Influence  de  la  Monnaie  et  du  Credit,"  in  Revue  d!  Economic 
Politique  (October,  1904),  XVIII.,  pp.  712-720. 

2  Quarterly   Journal   of   Economics    (August,    1904),     XVIII., 

P-   52 

190 


CREDIT  AND  THE  VALUE  OF  MONEY 

check-using  class,  and  in  so  far  reduce  the  demand  for 
actual  cash;  but  they  do  not  appreciably  retard  the  ab- 
sorption of  an  increased  amount  of  money  by  the  people. 
Moreover,  the  continuance  of  a  period  of  prosperity  in- 
creases the  demand  for  money  in  another  way,  since  after 
a  prolonged  period  of  steady  employment  multitudes  of 
people,  who  seldom  had  money  in  their  pockets  for  more 
than  a  few  hours  or  days  after  receiving  their  weekly 
wages,  now  have  money  enough  to  last  through  the  week, 
and  have  at  all  times  a  larger  amount  in  their  pockets  or  at 
their  homes." 

One  of  the  most  important  of  the  influences  which  coun- 
teract the  effect  of  changes  in  the  quantity  of  gold  is  the 
state  of  credit.  If  an  increase  or  decrease  of  the  gold  stock 
is  to  produce  a  direct  and  visible  effect,  the  state  of  credit 
must  be  constant.  The  same  willingness  to  loan  must 
prevail  at  all  times,  the  same  degree  of  confidence  must 
exist  among  bankers,  the  same  rate  of  discount  must  be 
open  to  borrowers  (else  the  number  of  borrowers  will  be 
diminished) ;  the  demand  for  capital  must  be  unchanging, 
and  the  entire  movement  of  bank  credits  and  clearings 
unchanged,  except  as  it  is  affected  by  the  increased  sup- 
ply of  metallic  money.  Such  conditions  are  never  realized. 
If  such  absolutely  static  conditions  arose  in  New  York, 
some  incident  in  Berlin  or  London  or  Paris  would  dis- 
turb them  by  increasing  the  rate  offered  for  gold  in  those 
places  and  so  changing  the  relations  of  the  money  market 
of  New  York  to  that  of  other  parts  of  the  world. 

One  of  the  factors  which  demonstrate  that  the  price  of 
commodities  is  not  determined  by  the  supply  of  metallic 
money  at  a  given  moment  is  the  movement  of  money 
back  and  forth  between  the  stock  exchanges  and  the 
money  markets  under  the  influence  of  changes  in  discount 
rates.  The  facility  of  such  transfers  has  been  greatly  in- 
creased by  the  use  of  foreign  banking  credits.  An  acute 
demand  for  credit,  due  in  part  to  undue  expansion  of 
credit  in  relation  to  gold,  is  often  met  by  the  sale  of  bills  of 

191 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

exchange  upon  foreign  banking  houses.  These  bills  are 
orders  by  a  New  York  banker,  for  instance,  upon  a  banker 
in  Berlin,  directing  him  to  pay  the  amount  of  the  bill  in 
Berlin.  The  buyer  of  such  a  bill  is  supplied  with  the 
means  of  making  his  payments  abroad,  and  the  money 
which  he  pays  for  the  bill  becomes  available  in  New  York 
for  lending  in  the  market.  Such  bills  may  be  drawn  upon 
a  deposit  previously  made  by  the  New  York  banker  in 
Berlin,  or  they  may  be  drawn  without  such  a  deposit, 
upon  the  faith  of  the  credit  of  the  New  York  banker.  The 
effect  of  such  operations  upon  the  demand  for  gold  is  well 
described  by  Nogaro:1 

"In  reality,  the  bill  of  exchange  is,  in  international 
commerce,  not  only  a  method  of  clearing,  but  an  in- 
strument of  credit.  It  not  only  permits  the  offset  of 
reciprocal  credits  for  an  equal  amount,  but  also  obviates 
the  settlement  of  a  difference  by  giving  to  the  debtor 
country  the  means  of  waiting  to  effect  the  payment  until 
it  is  creditor  for  an  equal  amount.  Thus  the  employ- 
ment of  the  bill  of  exchange  suppresses  the  minor  oscilla- 
tions to  which  the  balance  of  obligations  is  necessarily 
subject,  by  extending  according  to  the  needs  of  the  co- 
exchangers  the  period  during  which  the  adjustment  is 
made.  It  contributes  then  to  maintain  and  render  more 
apparent  the  equilibrium  of  the  balance  of  trade;  but  it 
should  be  observed  that  if  equilibrium  is  attained,  it  is 
not  by  the  action  of  metallic  money." 

The  determination  whether  drafts  shall  be  sold  in  Lon- 
don on  Berlin  or  in  Berlin  on  London  is  based  upon  the 
rate  of  discount.  The  rate  of  discount  is  determined 
partly  by  the  movement  of  free  capital  and  partly  by  the 
demand  for  money,  which  is  the  most  concrete  expression 
of  free  capital.  The  movement  of  money  under  the 
operation  of  the  charge  for  its  rental — technically  called 
"the  discount  rate" — is  often  independent  of  any  direct 

*  Le  Rdle  de  la  Monnaie,  p.  89. 
192 


CREDIT  AND  THE  VALUE  OF  MONEY 

and  obvious  variations  in  its  exchange  value  in  com- 
modities. Changes  in  the  discount  rate  attract  money 
for  the  special  purposes  for  which  it  is  needed  by  brokers 
and  bankers,  who  have  contracts  to  deliver  money  which 
they  may  be  called  upon  to  fulfil.  It  is  only  when  the 
demand  for  money  is  the  symptom  of  deeper  economic 
disturbances — in  the  misapplication  or  increased  demand 
for  circulating  capital — that  changes  in  the  discount  rate 
are  followed  by  changes  in  the  value  of  money  as  measured 
in  commodities.  The  two  influences  often  accompany 
one  another,  but  they  are  not  inseparable.  The  rate  of  in- 
terest is  the  measure  of  the  rental  of  capital,  and  it  may 
happen  that  an  increase  in  the  supply  of  money 'is  not 
accompanied  by  high  prices  nor  low  interest  rates.  As 
Beaure  declares:1 

"The  rate  of  interest  was  sufficiently  high  in  the  period 
from  1850  to  1860,  when  money  became  so  abundant  by 
the  influx  of  the  gold  of  California  and  Australia;  it  was, 
on  the  contrary,  very  low  in  Western  Europe  during  the 
period  1882-92,  although  the  production  of  gold,  the  only 
actually  effective  money  of  the  rich  nations  of  Europe,  was 
considerably  restricted." 

.  The  rate  of  interest  in  these  cases  comprehended  the 
charge  for  the  rental  of  capital,  as  well  as  the  incidental 
demand  for  the  rental  of  money,  and  the  demand  for 
capital  was  large  in  the  first  instance  in  proportion  to  the 
supply  and  smaller  at  the  later  epoch. 

In  regard  to  temporary  fluctuations  in  the  exchange 
value  of  money,  it  is  clear  that  they  are  not  controlled  by 
the  ratio  of  the  quantity  of  money  to  the  quantity  of  goods. 
There  may  be  a  great  rise  in  the  value  of  money  without 
any  corresponding  reduction  of  the  quantity,  and  there 
may  be  a  great  fall  in  its  value  without  any  corresponding 
increase  in  its  quantity.  Its  value  must  be  measured  by 
the  prices  of  one  commodity  or  several,  or  by  the  repre- 

1  Thtorie  et  Pratique  de  la  Monnaie,  p.  33. 
i.-w  193 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

sentatives  of  such  commodities.  Taking  securities  as 
such  a  basis  for  the  value  of  money,  the  six  months  of  the 
spring  and  summer  of  1903  witnessed  an  average  decline 
of  perhaps  forty  per  cent,  in  the  price  of  securities  quoted 
on  the  New  York  Stock  Exchange.  If  these  titles  to 
property  were  the  gauge  of  the  quantity  of  money  in  the 
United  States,  then  the  amount  must  have  decreased  by 
forty  per  cent,  within  the  brief  space  of  six  months.  In 
fact,  neither  the  mass  of  gold  in  the  world,  representing 
about  five  thousand  millions  of  dollars,  nor  the  stock  of 
gold  in  the  United  States,  amounting  to  about  twelve 
hundred  millions,  nor  the  total  currency  supply  of  the 
United  States  suffered  material  changes  during  this  period. 
The  total  circulation  rose  from  $2,374,353,720  at  the  end 
of  April  to  $2,427,394,868,  at  the  end  of  October,  and  the 
per  capita  circulation  increased  from  $29.08  to  $29.99. 

The  changes  in  the  purchasing-power  of  money  which 
occurred  under  these  circumstances  were  due  to  changes 
in  the  condition  of  credit  and  the  demand  for  capital. 
With  the  decline  in  the  quantity  of  available  credit,  due 
to  absorption  of  floating  capital  in  new  enterprises,  the 
demand  for  money  became  more  acute  than  the  demand 
for  securities  and,  without  any  decline  in  its  quantity,  its 
purchasing-power  over  securities  was  increased. 

Such  instances  go  far  to  demonstrate  that  changes  in 
the  conditions  of  credit  are  so  wide  and  frequent  as  to 
deprive  of  value  the  comparison  of  prices  in  order  to 
reveal  the  effects  of  changes  in  the  quantity  of  money. 
If  so,  the  attempts  to  demonstrate  the  quantity  theory  of 
money  by  statistics  must  be  abandoned.  It  may  be  true 
theoretically,  and  probably  is,  that,  other  things  being 
equal,  a  change  in  the  quantity  of  money  would  cause  a 
change  in  the  relation  of  money  to  certain  commodities. 
If,  however,  the  changes  over  a  short  term  of  years  caused 
by  a  large  increase  or  decrease  in  the  stock  of  money  are 
confused  by  the  more  frequent  and  extreme  changes 
caused  by  other  influences,  then  it  becomes  extremely 

194 


CREDIT    AND    THE    VALUE    OF    MONEY 

difficult,  if  not  impossible,  to  isolate  the  residuum  of  the 
change  in  the  relations  of  money  to  prices  caused  by 
changes  in  the  quantity  of  money  in  existence. 

The  temporary  changes  in  the  ratio  of  money  to  goods 
would,  moreover,  be  found  upon  almost  any  reasonable 
hypothesis  to  be  much  more  important  than  the  per- 
manent changes.  Let  it  be  supposed,  for  illustration,  that 
within  a  period  of  fifty  years  there  was  an  increase  of  100 
per  cent,  in  the  ratio  of  the  quantity  of  money  to  the 
quantity  of  transactions  in  which  it  was  employed.  The 
average  increase  in  the  quantity  of  money  then  would  be 
two  per  cent,  a  year.  While  a  permanent  gain  or  loss  of 
this  amount  would  be  a  factor  of  some  importance,  it  is 
nothing  like  as  great  a  factor  as  an  advance  or  fall  of 
prices  due  to  changes  in  the  condition  of  credit  and  the 
relation  of  production  of  goods  to  demand  for  them. 
These  changes  often  reach  twenty-five  per  cent,  in  five 
years,  or  five  per  cent,  a  year.  They  would  represent, 
therefore,  in  the  case  supposed,  an  influence  more  than 
twice  as  important  as  the  influence  of  the  gradual  increase 
or  decrease  of  the  stock  of  metallic  money.  It  is  interest- 
ing to  consider  how  these  influences  would  interact  upon 
one  another  if  they  were  felt  in  opposite  directions.  Let  it 
be  supposed  that  with  the  gold  supply  steadily  increasing 
at  the  rate  of  two  per  cent,  a  year,  there  was  a  collapse  of 
credit  amounting  to  five  per  cent,  a  year  for  five  years. 
The  result  may  be  set  forth  in  the  following  table: 


Rise  of  prices 
by  depreciation 

Fall  of  prices 
by  impaired 

Net  fall 

of  gold. 

credit. 

in  prices. 

YEAR 

(per  cent.) 

(per  cent.) 

(per  cent.) 

2 

5 

3 

1891                      .             .  .  . 

4 

10 

6 

1892 

6 

IS 

9 

180*.  . 

8 

20 

12 

I8O4..  . 

.  .10 

25 

IS 

Thus  it  would  appear  that  with  a  steady  increase  of  the 
gold  stock  at  the  rate  of  two  per  cent,  per  year,  a  decline 
of  prices  to  the  amount  of  fifteen  per  cent,  in  five  years 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

might  emerge.  On  the  other  hand,  if  the  gold  stock  were 
decreasing  at  the  same  rate,  and  credit  expanding,  we 
should  have  just  the  opposite  result — a  net  increase  in 
prices  of  fifteen  per  cent.  If  both  influences  operated  in 
the  same  direction,  there  might  be  a  rise  of  prices  by 
thirty-five  per  cent,  or  a  decline  of  thirty-five  per  cent. 

In  presenting  the  table  it  has  been  necessary  to  assume 
a  definite  foreknowledge  of  the  effect  of  two  conflicting 
influences.  But  it  is  just  this  assumption  which  is  the 
thing  sought  to  be  proved  by  tables  dealing  with  the  re- 
lation of  currency  to  prices  of  commodities.  The  method 
usually  employed  is  that  of  averaging  prices  over  long 
periods,  upon  the  theory  that  the  rise  of  prices  due  to  ex- 
panding credit  will  be  in  the  same  proportion  in  one 
period  as  in  another.  It  is  obvious,  however,  that  this  is  an 
assumption  for  which  evidence  is  lacking.  A  number  of 
influences,  like  the  opening  of  new  markets,  the  disturb- 
ance caused  by  wars  and  rumors  of  wars,  the  difference 
in  the  character  of  speculation  at  different  periods,  changes 
in  the  economy  of  money  (like  the  creation  of  stock-ex- 
change clearing-houses),  the  different  rates  of  earnings  for 
capital  under  varying  conditions  of  its  supply — all  enter 
into  the  problem,  and  make  it  clear  that  the  ratio  of  ex- 
pansion due  to  credit  conditions  in  one  period  is  not  evi- 
dence of  the  ratio  of  expansion  due  to  such  conditions  at 
some  other  period.  So  powerful  is  the  influence  of  change 
in  conditions  of  credit  in  modifying  the  quantitative  rela- 
tions between  gold  and  goods  as  to  abundantly  justify  the 
caution  given  by  Keynes  in  regard  to  the  quantity  law  of 
money:1 

"  This  is,  in  a  sense,  a  hypothetical  law ;  it  does  not  enable 
us  to  say  that  whenever  there  is  an  actual  increase  in  the 
quantity  of  money  in  circulation  there  will  actually  be  a 
rise  in  prices ;  nor  does  it  even  enable  us  to  say  that  if  we 
find  an  increase  in  the  amount  of  money  in  circulation 

1  Scope  and  Method  of  Political  Economy,  p.  216. 
196 


CREDIT  AND  THE  VALUE  OF  MONEY 

taking  place  concurrently  with  a  general  rise  in  prices,  the 
latter  phenomenon  must  of  necessity  be  wholly  due  to 
the  former.  For  the  cause  in  question  is  not  the  only 
one  capable  of  affecting  general  prices.  Its  effects  may, 
therefore,  be  counteracted  by  the  concurrent  operation  of 
more  powerful  causes  acting  in  the  opposite  direction,  or 
exaggerated  by  the  concurrent  operation  of  causes  acting 
in  the  same  direction." 


IV 

THE    RELATION    OF   MONEY    TO    PRICES 

Changes  in  the  quantity  of  money  bear  but  a  small  ratio  to  the 
total  stock — Efforts  to  ascertain  fluctuations  in  value  of  money 
by  index  numbers — Difficulties  and  pitfalls  of  the  method — In- 
fluences which  have  reduced  gold  prices — Fall  in  labor-cost  of 
commodities  resulting  from  machinery — Reduced  cost  of  trans- 
portation to  central  markets — The  rise  in  gold  wages — Influence 
of  increased  activity  in  business  and  of  more  rapid  movement  of 
credits — Summing  up. 

IT  has  been  seen  that  the  quantity  of  money  is  one 
of  the  influences  affecting  its  value,  but  that  it  is 
only  one  of  many  influences  acting  upon  the  relation 
of  money  and  other  things.  We  have  seen  that  even  if 
credit  were  not  a  factor  in  modern  monetary  operations, 
the  effect  of  changes  in  the  quantity  of  money  would  be 
first  felt  upon  certain  goods  rather  than  uniformly  upon 
all  goods.  We  have  seen  also  that  the  relation  of  the 
quantity  of  money  to  the  quantity  of  goods  is  still  further 
complicated  by  radical  and  frequent  changes  in  conditions 
of  credit,  which  are  usually  much  more  potent  over  short 
periods  than  the  changes  which  could  be  produced  by 
changes  in  the  quantity  of  gold.  With  these  qualifica- 
tions of  the  quantity  theory  of  money  firmly  fixed  in  the 
mind,  it  becomes  possible  to  deal  with  moderation  with 
the  history  of  prices,  and  to  admit  the  influence  which 
may  have  been  exerted  over  long  periods  of  time  by 
changes  in  the  ratio  of  the  quantity  of  gold  to  the  quan- 
tity of  goods  and  of  transactions. 

One  of  the  reasons  why  changes  in  the  quantity  of 

198 


THE    RELATION    OF    MONEY    TO    PRICES 

gold  or  of  other  legal -tender  money  are  felt  in  only  a 
small  measure  over  limited  periods  of  time  is  the  small 
ratio  which  the  production  of  gold  in  a  single  year  or  in 
several  years  bears  to  the  existing  stock.  If  money  were 
a  perishable  article,  so  that  the  whole  supply  was  the 
product  of  a  single  year,  then  it  would  be  subject  to  the 
same  violent  fluctuations  in  relation  to  other  things 
which  might  be  true  of  wheat,  potatoes,  or  oranges, 
whose  product  varies  greatly  from  year  to  year.  But 
with  a  production  of  gold  which  amounted  from  1493 
to  the  close  of  1903  to  about  $11,000,000,000,  it  is  obvious 
that  the  effect  of  small  changes  in  the  annual  supply 
would  not  be  immediately  felt.  The  largest  production 
of  gold  recorded  up  to  the  close  of  1903  was  $325,527,250, 
in  the  year  1903,  which  was  about  three  per  cent,  of  the 
world's  production  since  1493.  I*  nas  already  been  seen1 
that  a  considerable  portion  of  the  annual  production 
would  be  absorbed,  other  things  being  equal,  by  increas- 
ing demands  for  gold  for  the  arts,  for  replacing  wear  and 
tear  in  the  money  stock,  and  for  increase  in  volume  of 
business. 

This  last  demand  would  not  be  in  a  definite  mathe- 
matical ratio  to  increase  of  business,  but  upon  the  whole 
a  large  increase  in  the  number  of  transactions  over  a 
series  of  years  would  demand  an  increasing  quantity  of 
gold.  With  these  elements  given  due  weight,  it  is  evi- 
dent that  an  increase  of  three  per  cent,  in  a  year  in  the 
gold  stock  of  the  world  would  be  far  from  implying  that 
the  ratio  of  gold  to  goods  had  increased  in  a  correspond- 
ing proportion.  This  could  only  be  true  in  case  the 
annual  production  of  other  things  remained  stationary 
in  volume,  while  that  of  gold  advanced.  Both  gold  and 
other  goods  are  subject  to  fluctuations  in  volume  of 
production.  The  amount  of  goods  produced  may  in 
some  years  more  than  keep  pace  with  the  increase  in 

1  Bk.  i.,  chap.  vii. 
199 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

the  production  of  gold,  and  in  other  years  may  fall  far 
behind,  but  upon  the  average  of  a  series  of  years  during 
the  modern  industrial  era  production  both  of  goods  and 
of  gold  has  increased. 

It  is  obvious,  therefore,  that  an  increase  of  three  per 
cent,  in  the  stock  of  gold  is  not  a  fact  which  in  itself  car- 
ries the  demonstration  of  an  increase  in  the  ratio  of  gold 
to  other  things.  Even  if  such  an  increase  were  conceded, 
we  have  seen  that  the  principles  governing  the  value 
and  distribution  of  money  are  such  that  the  change  would 
not  in  any  case  be  uniformly  distributed,  that  the  new 
gold  would  probably  not  enter  at  once  into  use  as  money, 
and  that  the  influence  of  its  increased  quantity  would 
be  involved  with  and  counteracted  by  manifold  other 
influences  acting  upon  prices.1  We  shall  see  hereafter 
that  the  new  gold,  instead  of  being  added  to  the  stock 
already  in  use  in  communities  well  supplied  with  money, 
would  probably  find  its  way  into  communities  where  the 
money  supply  was  more  scanty  and  would  tend  to  pro- 
mote activity  of  transactions  without  acting  directly  in 
raising  prices. 

The  important  movements  in  prices  which  have  been 
commonly  ascribed  to  changes  in  the  quantity  of  gold  and 
silver  money  have  been  the  advances  in  prices  which 
occurred  in  the  sixteenth  and  seventeenth  centuries, 
after  the  discovery  of  the  treasures  of  Mexico  and  Peru; 
the  advance  in  prices  which  occurred  after  1860,  when  the 
mines  of  California  were  pouring  their  treasures  into  the 

1  Senior,  although  an  advocate  of  the  quantity  theory,  testifies 
to  the  slow  influence  of  changes  in  production.  Writing  about 
1840,  he  says:  "The  slowness  with  which  any  alteration  in  the 
productiveness  of  the  mines  shews  itself  is  strikingly  proved  by 
the  fact,  that  civil  disturbances  have  rendered  the  Mexican  mines 
almost  totally  unproductive  for  the  last  fifteen  years,  so  much 
so  indeed,  that  silver  has  been  sent  to  Mexico  from  Europe,  and 
yet  neither  the  general  value  of  silver,  nor  its  specific  value  in 
gold,  has  suffered  any  perceptible  alteration." — The  Value  oj 
Money,  p.  73. 

200 


THE    RELATION    OP    MONEY   TO    PRICES 

money  market;  and  the  check  in  this  advance,  which 
occurred  after  1873  and  was  attributed  by  the  opponents 
of  the  gold  standard  to  the  scarcity  of  gold  and  the  aban- 
donment by  several  countries  of  silver  as  their  standard 
of  value. 

Regarding  the  first  period  exact  historical  data  are 
scanty  and  are  complicated  by  the  radical  changes  going 
on  in  the  economic  development  of  England  and  other 
countries  making  large  use  of  money.  Upon  the  whole, 
there  seems  to  be  reason  to  accept  the  view  of  Adam 
Smith  that  silver  (which  was  then  usually  referred  to  as 
the  standard)  fell  rapidly  in  purchasing-power  from  1570 
to  1 640 ;  although  it  may  be  possible  to  dispute  the  calcu- 
lations of  Hume  that  prices  rose  three  or  four  times  after 
the  discovery  of  the  West  Indies.1  Jacob  put  the  in- 
crease as  from  100  to  47o.2  A  part  of  this  increase  was 
due  to  the  increased  weight  of  cattle  and  sheep  and  to 
increase  in  demand  for  agricultural  products  arising 
from  the  growth  of  population  in  cities;  but  a  part  was 

1  This  influence  was  not  felt  seriously  until  after  the  opening 
of  the  mines  of  Potosi  in  1545.     It  is  declared  by  Humboldt  that, 
"  Whilst  the  stream  of  gold  and  silver  flowed  from  West  to  East, 
Spain  was  merely  the  channel  of  communication.     But  little  of  it 
remained  in  that  country." — The  Fluctuations  of  Gold,  p.  29.     It 
is  pointed   out   by   Schoenhof,   a  pronounced  opponent  of  the 
quantity  theory  of  money,  that  the  foreign  trade  of  Great  Britain 
in  the  early  part  of  the  seventeenth  century  was  very  limited 
(imports  and  exports  together  in   1610  being  £4,628,586),  and 
that  "it  is  from  foreign  trading  alone  that  an  influx  of  specie 
could  be  made  available  to  bear  on  prices." — Money  and  Prices, 

P-  J35- 

2  Production  and  Consumption  of  the  Precious  Metals,  II.,  p.  84. 
Humboldt  says  that  "careful  inquiries  have  shown  that  in  the 
north  of  Italy  the  advance  in  the  price  of  grain,  wine,  and  oil, 
from   the   fifteenth   to   the  eighteenth  century,   was  much  less 
considerable  than  we  might  reasonably  conclude  from  what  is 
known  to  us  of  England,   France,  and  Spain,  in  which  latter 
countries  the  prices  of  grain,  since  the  discovery  of  America, 
have  advanced  four  and  even  sixfold."  —  The  Fluctuations  of 
Gold,  p.  30. 

201 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

undoubtedly  due  to  the  increase  in  the  quantity  of  money, 
which  acted  not  merely  by  the  increased  quantity  of 
metal  set  over  against  other  things  in  exchanges,  but  by 
the  stimulus  which  was  afforded  by  money  to  the  exten- 
sion of  agricultural  and  manufacturing  production  for 
markets  in  which  their  products  could  be  sold  for  money. 

Much  more  extensive  is  the  material  for  studying  the 
relation  of  money  to  prices  in  later  times,  but  the  con- 
clusions to  be  drawn  from  it  are  none  the  less  a  subject  of 
dispute.  The  effort  to  determine  whether  gold  had  be- 
come scarce  or  plentiful  in  relation  to  goods  has  been 
made  many  times  through  carefully  compiled  statistics 
of  average  prices.  Strictly  speaking,  the  fact  that  the 
price  of  any  single  commodity  in  a  gold-standard  country 
varied  from  one  date  to  another — as  if  wheat  on  May  i , 
1900,  was  eighty  cents  a  bushel,  and  on  May  i,  1901,  was 
ninety  cents — would  in  itself  constitute  a  variation  in 
the  relation  of  wheat  to  gold.  What  has  been  attempted, 
however,  by  those  who  have  sought  to  use  statistics 
of  prices  to  reveal  the  relation  between  goods  and  gold, 
has  been  the  combination  of  prices  of  different  articles 
by  a  system  of  averages  in  order  to  show  that  it  was  gold 
which  had  changed  in  its  relation  to  all  commodities, 
rather  than  isolated  commodities  which  had  changed  in 
their  relations  to  gold.  Minute,  laborious,  and  ingenious 
as  these  calculations  have  been,  it  is  doubtful  if  they 
have  produced  any  conclusion  more  definite  or  convincing 
than  the  purely  deductive  reasoning  by  which  it  is  as- 
sumed that  a  large  increase  in  the  quantity  of  money 
would  tend  to  lower  its  value  by  increasing  the  supply  in 
relation  to  demand,  or  that  a  large  decrease  would  tend 
to  raise  its  value  by  diminishing  supply  in  relation  to 
demand. 

The  system  of  index  numbers,  so-called,  for  comparing 
changes  in  prices,  was  adopted  by  Jevons  in  order  to 
reduce  to  a  common  basis  of  comparison  prices  for  widely 
variant  units  of  different  commodities.  The  method 

202 


THE    RELATION    OF    MONEY    TO    PRICES 

adopted  was  to  take  the  monthly  prices  of  certain  articles, 
reduce  the  monthly  prices  for  each  for  the  year  to  an 
annual  average,  and  reduce  the  differences  shown  between 
prices  for  different  years  to  a  decimal  scale,  determined 
by  assuming  the  average  price  for  a  given  year  or  series 
of  years  to  represent  100.  Thus,  if  wheat  sold  in  1860  at 
$1.20  per  bushel  and  in  1865  at  $1.50,  the  "index  num- 
bers" obtained,  if  prices  in  1860  were  treated  as  the  base- 
line, would  be  100  for  1860  and  125  for  1865.  This 
method  of  treating  prices  enabled  Jevons  to  claim  that 
he  had  reduced  prices  of  different  articles,  based  upon 
different  units  of  value,  to  a  common  basis  of  compari- 
son, upon  the  ground  that  ratios  "are  things  of  the  same 
kind,  but  of  different  amounts,  between  which  we  can 
take  an  average."  l 

Jevons  recognized  the  criticism  which  would  be  di- 
rected against  taking  the  prices  of  a  single  year — that 
they  would  be  materially  influenced  by  fluctuations  in 
conditions  of  credit,  independently  of  changes  in  the 
quantity  of  gold.  He  sought  to  eliminate  this  element 
of  disturbance  by  taking  as  his  base-line  the  average 
level  of  prices  for  the  six  years  1845  to  1850,  inclusive. 
Taking  the  combined  prices  of  these  years  as  the  equiva- 
lent of  100,  he  reduced  the  price  of  the  same  articles  to  a 
corresponding  basis  for  each  year  and  in  this  way  sought 
to  ascertain  the  variations  from  year  to  year  in  the  aver- 
age prices  of  a  group  of  thirty-nine  articles,  ranging  from 
89.6  in  1849  to  128.8  in  1857,  and  backward  again  to 
113.4  in  1862.  Admitting  the  possibility  of  difficulty 
due  to  changes  in  conditions  of  credit,  Jevons  made  the 
following  argument:2 

1  Investigations  in  Currency  and  Finance,  p.  23.  This  conclusion 
is  debatable  and  is  subject  to  many  pitfalls  in  practice.  Padan 
declares.  "We  are  considering  relations,  and  Jevons  draws  an 
average  between  relations,  neglecting  meantime  the  objects 
related,  and  then  he  applies  the  result  to  the  objects."-  -"Prices 
and  Index  Numbers,"  in  Journal  of  Political  Economy  (March,  1900), 
VIII.,  p.  187.  *  Investigations  in  Currency  and  Finance,  p.  48. 

203 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

"Such  a  revulsion  [of  credit]  took  place  in  1857;  but, 
although  five  years  have  since  elapsed,  prices  are  far  from 
having  fallen  to  their  old  level.  In  the  last  two  years 
especially  the  dearth  of  cotton  has  caused  a  depression  of 
trade  of  a  formidable  character.  The  lowest  average 
range  of  prices  since  1851  has  indeed  happened  in  the 
last  year,  1862 ;  but  prices  even  then  stood  thirteen  per 
cent,  above  the  average  level  of  1845-1850;  and  it  is 
most  highly  improbable  that  prices  will  long  continue  to 
fall;  yet  prices  have  continually  stood  above  the  high 
point  they  reached  in  1847!  Examine  the  yearly  average 
prices  at  any  point  of  their  fluctuations  since  1852,  and 
they  stand  above  any  point  of  their  fluctuations  before  then 
within  the  scope  of  my  tables!  There  is  but  one  way  of 
accounting  for  such  a  fact,  and  that  is  by  supposing  a 
very  considerable  permanent  depreciation  of  gold." 

This  quotation  reveals,  in  a  measure,  the  method  pursued 
by  those  who  depend  upon  mathematical  demonstration 
to  prove  changes  in  the  relation  of  gold  to  goods.  Since 
this  work  of  Jevons,  many  other  efforts  have  been  made 
to  reduce  changes  in  the  value  of  money  to  the  form  of 
index  numbers.  Among  those  who  have  employed  this 
method  most  carefully  have  been  Adolph  Soetbeer,  the 
London  Economist,  Mr.  Sauerbeck,  and  Professor  Falkner, 
under  the  authority  of  the  Finance  Committee  of  the 
United  States  Senate.  These  attempts  have  varied  in 
the  degree  of  elaboration  with  which  the  effort  has  been 
made  to  eliminate  sources  of  error.  It  has  been  ad- 
mitted on  all  sides  that  such  sources  of  error  were  possible 
in  the  failure  to  deal  with  a  sufficient  number  of  articles 
in  obtaining  averages;  in  the  wide  fluctuations  in  the 
prices  of  single  commodities  due  to  special  conditions; 
and  in  the  failure  in  some  cases  to  give  due  weight  to 
the  proportions  in  which  each  article  might  enter  into 
consumption.  Notwithstanding  efforts  to  prevent  these 
errors,  it  has  been  found  that  upon  the  whole  the  results 
are  not  widely  different,  whether  the  method  employed 

204 


THE    RELATION    OP    MONEY   TO    PRICES 

has  been  that  of  a  simple  average  of  a  number  of  articles, 
or  what  has  been  called  the  weighting  system,  of  giving 
to  each  article  the  proportionate  weight  to  which  it  would 
be  entitled  by  its  relation  to  consumption.  The  most 
careful  and  comprehensive  studies  in  some  respects  were 
those  made  under  authority  of  the  Senate  Committee  on 
Finance  by  Professor  Falkner,  but  the  tables  of  actual 
prices  are  impaired  in  value  by  the  wide  fluctuations  in 
the  gold  value  of  the  paper  currency  of  the  United  States 
prior  to  the  resumption  of  specie  payments  at  the  be- 
ginning of  1879.  One  of  the  simplest  tables,  which  will 
serve  to  illustrate  the  others,  is  that  of  Sauerbeck,  which 
takes  average  prices  for  the  ten  years  1867-77  as  I0°- 
Thirty-seven  different  articles  are  used,  but  several  in 
different  grades,  so  that  a  total  of  fifty-six  items  is  in- 
cluded. The  average  index  numbers  obtained  for  certain 
representative  years  are  as  follows: 

SAUERBECK'S  INDEX  NUMBERS 
(Index  numbers  for  1867-77  equal   100.) 

Total  materials    Grand  total 
85  89 

78  77 

101  101 

100  99 

108  101 

99  9<5 

114  in 

93  96 

78  83 

84  88 

70  72 
67  68 

71  72 

60  62 

61  64 

70  68 
80       75 

72  70 

71  69 

The  grand  total  is  not  necessarily  the  average  of  the 
two  totals  given,  because  these  latter  are  only  the  aver- 

205 


YEAR 
1846  

Total  } 
95 

1850  

75 

1855  

101 

1860  

98 

1865  

9i 

1870  

93 

1873  

107 

1875  

IOO 

1879  

9° 

1880  

94 

1885  

74 

1887  

7° 

1890  

73 

1895  

64 

1898  

68 

1899  

65 

1900  

69 

1901  

67 

1902  

67 

THE  PRINCIPLES  OP  MONEY  AND  BANKING 

ages  of  the  prices  of  articles  which  are  not  the  same  in 
number  under  both  sub-heads.  The  lowest  and  highest 
figures  obtained  for  various  years  are  given  in  order  to 
show  how  considerable  are  the  variations  of  prices  from 
year  to  year.  Thus,  the  grand  total  shows  that  prices 
stood  at  in  in  1873  and  had  shrunk  in  1879  to 
83,  to  recover  again  in  1880  to  88.  It  is  admitted, 
even  by  the  advocates  of  the  quantitative  theory, 
that  it  is  somewhat  difficult  to  account  for  these  vari- 
ations as  the  result  of  changes  in  the  quantity  of 
gold.  They  endeavor  to  reach  the  desired  result,  how- 
ever, by  treating  these  wide  fluctuations  from  year  to 
year  as  temporary  and  seeking  to  ascertain  the  true 
trend  of  fluctuations  over  a  series  of  years  in  much  the 
method  indicated  by  the  passage  from  Jevons  already 
quoted. 

It  is  doubtful,  however,  if  such  sources  of  error  can  be 
eliminated  with  sufficient  precision  to  leave  a  residuum 
definite  enough  to  justify  any  mathematical  conclusions 
on  the  subject  of  the  effect  of  changes  in  the  quantity  of 
gold  on  prices  of  goods.  One  of  the  most  insidious  sources 
of  error  is  the  wide  variations  of  high  and  low  prices  which 
are  covered  up  by  the  system  of  averages.  If  wheat 
stands  at  $1.60  per  bushel  in  January  and  at  eighty  cents 
in  July,  the  average  for  the  year  (assuming  that  these  are 
the  only  quotations  available)  is  $1.20;  but  the  inclusion 
of  an  index  number  of  120  in  a  table  of  prices  entirely  fails 
to  account  for  the  change  between  January  and  July  by 
corresponding  changes  in  the  quantity  of  gold.  It  is 
admitted  by  Jevons  in  the  passage  above  quoted,  that 
"  the  dearth  of  cotton"  was  a  serious  factor  prior  to  1862, 
and  in  his  tables  of  average  prices  he  deliberately  rejects 
the  actual  prices  of  cotton,  which  in  1862  stood  at  349 
for  upland,  in  comparison  with  his  standard  of  100,  and 
substitutes  for  both  1861  and  1862  the  average  price  of 
1860,  with  the  declared  purpose  of  eliminating  "temporary 
fluctuations."  In  the  case  of  hemp  and  flax  also,  the  real 

206 


THE    RELATION    OF    MONEY   TO    PRICES 

prices  were  omitted  from  the  computations,  and  different 
ones  used,  for  1853,  1854,  and  1855,  because  of  the  unusual 
variations  caused  by  the  Russian  war. 

Whatever  the  justification  for  these  rectifications,  it  in- 
dicates one  of  the  elements  of  danger  in  attempting  to 
measure  by  prices  the  fluctuations  in  the  stock  of  gold. 
It  is  not  obvious  why  the  ebb  and  flow  of  gold  should  be 
rejected  as  the  controlling  influence  in  fixing  the  actual 
prices  of  wheat  in  January  and  July  and  should  be  accept- 
ed as  fixing  the  intangible  concept  of  the  "average  price" 
for  the  year.  The  rejection  of  the  influence  of  the  gold 
stock  in  fixing  actual  prices  involves  the  admission  of  a 
fact  dangerous  to  the  entire  theory  of  index  numbers  as 
indicating  the  effect  of  changes  in  the  gold  stock  on 
goods  —  that  the  fluctuations  in  actual  prices  which  are 
caused  by  influences  directly  affecting  goods  are  much 
greater  than  those  caused  by  changes  in  the  stock  of 
gold. 

Another  insidious  danger  of  the  system  of  averages  is 
the  averaging  of  statistics  of  prices  without  reference  to 
the  volume  of  transactions  at  these  prices.  If,  for  in- 
stance, wheat  sells  in  January  at  $1.00  per  bushel,  and 
in  October  at  60  cents,  the  average  of  the  two  quota- 
tions appears  to  be  80  cents.  If,  however,  ten  times 
as  much  wheat  is  sold  at  60  cents  as  at  $1.00,  then  the 
true  average,  or  what  is  called  the  "weighted  average,"  is 
63.6  cents,  which  varies  more  than  twenty  per  cent,  from 
the  simple  arithmetical  average.1  Still  another  source  of 
error  is  giving  equal  weight  to  different  articles,  one  of 
which  may  be  of  much  less  importance  in  the  budget  of 
family  or  industrial  consumption  than  another.  If,  as 
Laughlin  points  out,  wheat  sells  at  70  cents  a  bushel  and 
indigo  at  $1.00  a  pound,  the  unweighted  average  is  85 
cents,  but  if  100,000,000  bushels  of  wheat  and  100,000 

1  As  Padan  points  out,  "  It  would  not  be  a  singular  phenomenon 
if  the  low  price  should  attract  an  unusual  sale." — Journal  of 
Political  Economy  (March,  1900),  VIII.,  p.  183. 

207 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

pounds  of  indigo  are  sold,  the  weighted  average  becomes 
70.92  cents.1 

It  is  obvious  from  these  illustrations  how  misleading 
may  be  the  averaging  of  a  variety  of  quotations  of  prices 
relating  to  no  common  unit  of  weight,  density,  or  size.  It 
may  easily  happen  that  the  average  will  remain  the  same, 
though  prices  of  some  commodities  greatly  fall  and  prices 
of  others  greatly  rise.2  These  considerations  lead  to 
others,  which  are  entirely  apart  from  the  merely  mathe- 
matical questions  involved  in  the  methods  of  obtaining 
and  comparing  index  numbers.  Even  if  the  results  ob- 
tained by  Jevons  and  other  inquirers  are  admitted  to  be 
indisputably  accurate  as  reflecting  movements  of  prices 
in  gold,  the  question  remains  whether  the  changes  in 
prices  revealed  are  due  to  influences  affecting  gold  or  to 
influences  affecting  goods.3  Among  the  considerations 


1  Principles  of  Money,  p.  158.  Still  another  source  of  danger 
is  the  fact  cited  by  Kinley  that  "Consumption  changes  its  char- 
acter. With  the  exception  of  a  few  articles  included  among  the 
necessaries  of  life,  there  is  almost  nothing  the  demand  for  which 
may  not  change  very  much  between  two  dates  of  consumption." 
— Money,  p.  236. 

*  Interesting  illustration  of  this  is  drawn  by  Schoenhof  from 
the  index  numbers  of  the  London  Economist.  The  years  1879, 
1884,  and  1888  afforded  total  index  numbers  very  nearly  the 
same — respectively  2202,  2221,  and  2230;  yet  among  particular 
articles  coffee  varied  from  106  to  166;  tea  from  64  to  m;  to- 
bacco from  156  to  244;  wheat  from  58  to  75;  cotton  from  73  to 
92;  wool  from  98  to  m;  and  tin  from  77  to  173.  These  varia- 
tions were  necessarily  in  different  directions  in  the  same  year, 
and  the  fact  that  they  give  nearly  the  same  average  shows  how 
little  averages  have  to  do  with  actual  prices. — Money  and  Prices, 
p.  10. 

1  Jevons  himself  was  much  more  guarded  in  his  interpretation 
of  his  investigations  than  some  of  his  later  followers.  He  said: 
"All  that  I  can  pretend  to  prove  in  this  inquiry  is  that,  subject 
to  the  vagueness  just  referred  to,  the  prices  of  commodities  have 
risen,  or  that  the  rise  of  prices  of  those  which  have  risen  prepon- 
derates over  the  fall  of  those  which  have  fallen.  This  is  and  con- 
stitutes the  alteration  of  value  of  gold  asserted  to  exist.  It  is  quite 

208 


THE    RELATION    OF    MONEY    TO    PRICES 

which  counsel  caution  in  accepting  index  numbers  and 
averages  as  proving  anything  definite  in  regard  to  gold, 
the  following  are  a  few: 

I.  The  fall  in  the  labor-cost  of  producing  commodities 
through  the  increased  efficiency  of  machinery. 

II.  The  fall  in  the  market  price  of  products  by  reason 
of  the  reduced  cost  of  transportation. 

III.  The  increase  in  the  efficiency  of  labor  shown  by  the 
increase  of  wages  measured  in  gold. 

IV.  The  increase  in  the  volume  of  goods  exchanged  be- 
tween distant  places  as  the  result  of  the  increase  in  the 
product  of  labor  and  the  increase  in  the  facility  of  the  dis- 
tribution of  this  product. 

V.  The  economies  in  the  use  of  gold  caused  by  more 
prompt  communication  and  the  use  of  foreign  credits 
within  shorter  time. 

The  first  two  of  these  propositions  have  been  among  the 
dominant  features  of  modern  industrial  life.  According 
to  the  United  States  Bureau  of  Labor,  as  long  ago  as  1886, 
the  gain  in  the  power  of  production  in  some  of  the  leading 
industries  of  the  United  States  "during  the  past  fifteen  or 
twenty  years,"  measured  by  the  displacement  of  the 
muscular  labor  formerly  employed  to  produce  a  given 
amount  of  produce,  has  been  as  follows:  In  the  manu- 
facture of  agricultural  implements,  from  50  to  70  per 
cent.;  in  the  manufacture  of  carriages,  65  per  cent.;  in 
the  manufacture  of  machines  and  machinery,  40  per 
cent.;  in  the  silk  manufacture,  50  per  cent.  In  1840 
an  operative  in  a  Rhode  Island  cotton -mill,  working 
thirteen  to  fourteen  hours  a  day,  turned  out  9600  yards 
of  standard  sheeting  in  a  year.  In  1871  the  product  per 
operative  had  advanced  to  26,531  yards,  representing  3382 
hours'  work;  and  in  1884,  to  32,391  yards,  representing 
2695  hours'  work  —  an  increase  within  thirteen  years  of 
22  per  cent,  in  product  and  a  decrease  of  20  per  cent,  in 

another  question  how  this  fall  of  value  is  caused." — Investigations 
in  Currency  and  Finance,  p.  2 1 . 

i.— 14  209 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

hours  of  labor.1  In  the  manufacture  of  boots  and  shoes 
the  following  striking  facts  are  presented : 2 

"In  one  large  and  long-established  manufactory  in  one 
of  the  Eastern  States  the  proprietors  testify  that  it  would 
require  five  hundred  persons  working  by  hand -processes 
to  make  as  many  women's  boots  and  shoes  as  one  hundred 
persons  now  make  with  the  aid  of  machinery,  a  displace- 
ment of  eighty  per  cent.  In  another  class  of  the  same 
industry  the  number  of  men  required  to  produce  a  given 
quantity  of  boots  and  shoes  has  been  reduced  one-half. 
In  another  locality,  and  on  another  quality  of  boots,  being 
entirely  for  women's  wear,  where  formerly  a  first-class 
workman  could  turn  out  six  pairs  in  one  week,  he  will  now 
turn  out  eighteen  pairs." 

These  cases  are  typical  of  many  others.  In  the  time  of 
Adam  Smith  it  was  considered  a  wonderful  achievement 
for  ten  men  to  make  48,000  pins  in  a  day;  in  1888,  three 
men  could  make  7,500,000  pins  of  a  better  and  uniform 
quality  in  the  same  time.3  It  is  obvious  that  these 
changes  in  the  labor-cost  of  producing  certain  articles 
have  had  two  effects:  they  have  changed  the  ratio  which 
prices  of  these  articles  would  bear  to  prices  of  articles  less 
affected  by  improvements  in  methods  of  production,  the 
exchange  value  of  the  latter  in  gold  remaining  the  same; 
and  they  have  changed  the  ratio  which  prices,  if  measured 
in  labor-cost,  would  bear  to  the  labor-cost  of  producing 
gold.  If  commodities  could  be  roughly  separated  into 
two  classes  only  (instead  of  the  infinite  variety  of  classes 
arising  from  constant  changes  in  methods  of  production 
affecting  each  by  itself),  the  class  whose  labor-cost  had 
been  reduced  by  improved  methods  of  production,  and 
the  class  where  no  such  reduction  had  been  made,  it 
would  not  be  possible  for  gold  to  conform  in  exchange 
value  to  the  variations  of  both.  It  must  either  have 

1  Wells,  p.  28. 

1  First  Annual  Report  of  the  Commissioner  of  Labor — "  Indus- 
trial Depressions,"  p.  81.  *  Wells,  p.  60. 

210 


THE    RELATION    OF    MONEY    TO    PRICES 

tended  to  increase  in  exchange  value  (or  "appreciated") 
in  relation  to  the  goods  whose  labor-cost  had  been  reduced, 
while  tending  to  remain  constant  in  relation  to  those  whose 
labor-cost  remained  constant,  or  it  must  have  tended  to 
remain  constant  in  exchange  value  in  relation  to  the  goods 
whose  labor-cost  had  been  reduced,  while  tending  to  fall 
(or  "depreciate")  in  relation  to  those  goods  whose  labor- 
cost  remained  constant. 

Even  if  the  cost  of  producing  given  classes  of  goods 
had  remained  constant,  the  reduction  in  railway,  lake, 
and  ocean  freights  would  have  caused  a  marked  fall  in 
the  price  of  these  goods  in  central  markets,  assuming 
their  relationship  to  gold  to  have  remained  otherwise 
the  same.  A  table  printed  by  H.  T.  Newcomb  shows 
that  while  the  export  price  of  wheat  per  bushel  declined 
from  92  cents  in  1867  to  75  cents  in  1897,  more  than 
the  entire  decline  was  covered  by  the  fall  in  railway 
charges  from  Chicago  to  New  York,  which  was  from 
32.38  cents  per  bushel  in  1867  to  12.50  cents  per  bushel  in 
1897.  In  1867  the  carriers  were  given  the  equivalent 
of  one  bushel  out  of  every  2.84  bushels  which  they  moved 
from  Chicago  to  the  Atlantic  seaboard,  as  compensation 
for  their  services,  but  in  1897  they  took  but  one  bushel 
out  of  every  six  transported.1 

Even  more  striking  is  the  decline  in  lake  and  canal 
charges.  In  1880  the  rate  on  wheat  from  Chicago  to 
New  York  per  bushel  was  13.13  cents;  in  1897  it  had 
fallen  to  5.22  cents;  and  in  1904  there  was  a  further  drop 
to  4.73  cents.2  The  number  of  bushels  carried  for  the 
price  of  one  bushel  rose  from  5. 77  in  1867  to  17. 24  bushels 
in  1897.  A  like  illustration  is  afforded  in  the  reduction 
in  the  price  of  coal  laid  down  at  the  door  of  the  consumer. 
With  prices  at  Philadelphia  in  1869  at  $3.92  per  ton,  the 
average  freight  rate  charged  by  the  Lehigh  Valley  Rail- 
way was  1.746  cents  per  ton  per  mile;  in  1897,  with  coal 

1  Railway  Economics,  p.  35. 

»  Year  Book  of  the  Department  of  Agriculture,  1904,  p.  719. 
211 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

at  Philadelphia  at  $3.50  per  ton,  the  cost  of  carriage  had 
fallen  to  .712  cents,  or  by  more  than  fifty  per  cent. 
The  distance  for  which  a  ton  of  coal  could  be  carried  for 
the  amount  of  its  price,  thereby  doubling  its  cost,  was 
200  miles  in  1869;  it  was  439  miles  in  1897. * 

These  changes  in  freight  rates  have  been  rendered 
possible — not  by  greater  or  less  quantities  of  gold  taken 
from  the  mines,  but  by  revolutions  in  railway  construc- 
tion. Increased  weight  and  power  of  locomotives  has 
increased  the  amount  of  freight  which  can  be  carried  in  a 
train  under  the  management  of  a  single  crew.  The  aver- 
age weight  of  a  locomotive  at  the  close  of  the  Civil  War 
was  about  90,000  pounds.  The  great  increase  in  size 
came  after  1890.  The  computed  average  was  about 
135,000  pounds  in  1893,  or  an  increase  of  about  fifty  per 
cent,  in  twenty-eight  years.  Within  five  years,  in  1898, 
there  was  an  increase  of  95,000  pounds,  to  an  average  of 
230,000  pounds.  Locomotives  were  constructed  in  1900 
weighing  365,000  pounds  and  twice  as  powerful  as  the 
best  of  fifteen  years  earlier.  With  such  increase  of  power 
has  gone  increase  in  capacity  of  cars.  In  the  sixties  the 
normal  capacity  of  a  freight-car  was  about  15,000  pounds. 
This  was  increased  in  1875  to  40,000  pounds;  in  1885 
to  60,000  pounds;  in  1895  to  70,000  pounds;  and  in 
1900  cars  of  80,000  to  100,000  pounds  ceased  to  be 
rare.2 

The  fall  in  rates  of  transportation  has  not  only  acted 
in  depressing  the  average  cost  in  labor  of  laying  down 
in  a  given  market  a  product  whose  labor-cost  may  be  as- 
sumed to  have  been  rigid,  but  it  has  influenced  the  dis- 
tribution of  products  and  the  character  of  freight  ship- 
ments. As  the  matter  is  illustrated  by  Powers:3 

1  Changes  in  the  rates  of  ch,arge  for  railway  and  other  trans- 
portation services. — United  States  Department  of  Agriculture, 
1898,  pp.  79-80. 

J  Vide  Final  Report  of  the  Industrial  Commission,  XIX.,  p.  292. 

'  Modern  Variations  in  the  Purchasing  Power  of  Gold>  p.  369. 

212 


THE    RELATION    OF    MONEY   TO    PRICES 

"  It  costs  but  little  more  to  ship  a  ton  of  wheat  from 
Iowa  to  New  York  than  to  ship  a  ton  of  hay.  The  ton 
of  hay  will  not,  with  its  lower  average  price,  bear  the 
cost  of  transportation  1000  miles,  as  will  the  dear-priced 
wheat.  It  has  not  been  shipped  a  long  distance  save  in 
exceptional  years.  Hay  prices  in  the  East  have,  there- 
fore, not  been  affected  by  changing  railway-rates  as  have 
those  of  the  dear-priced  grains.  As  the  result,  hay  prices 
have  been  increased  in  nearly  all  the  States  of  our 
Union. 

"...  In  1867-1870  the  price  of  wheat  in  New  York 
was  $48.09  per  ton,  and  that  of  hay,  $12.98.  In  1891 
to  1894  the  value  of  wheat  was  $27.85,  and  that  of  hay 
was  $10.76.  These  values  in  New  York  stand  in  con- 
trast with  those  of  Iowa.  In  that  State  the  prices  for 
the  earlier  and  later  periods  were  for  wheat  $24.23  and 
$20.70.  The  corresponding  values  for  hay  were  $5.68 
and  $6.51." 

Already  evidence  has  been  given  that  the  cost  of  mod- 
ern products  in  labor  has  been  greatly  reduced  by  the  in- 
troduction of  machinery  and  the  application  of  power. 
If  the  benefits  resulting  from  this  increased  efficiency  of 
labor  were  equally  distributed,  then  the  wages  of  labor, 
the  status  of  gold  remaining  constant,  would  be  corre- 
spondingly increased.  If,  on  the  other  hand,  the  decline 
in  the  prices  of  commodities  were  the  result  of  a  deficiency 
of  gold,  and  not  of  change  in  labor-cost,  then  wages  would 
naturally  yield  gradually  to  the  scarcity  of  the  means  of 
payment,  and,  after  a  certain  amount  of  friction,  would 
fall  in  something  like  the  same  ratio  as  commodities. 
If  this  fact  could  be  demonstrated,  the  argument  that 
scarcity  of  gold  is  indicated  by  index  numbers  would 
acquire  at  least  a  certain  superficial  force.  But  the 
exact  contrary  is  the  fact.  Statistics  of  wages  show  that 
wages  expressed  in  gold  have  risen  in  a  remarkable  de- 
gree, while  prices  have  been  falling.  This  is  indicated 
by  the  Falkner  report.  The  result  reduced  all  wages  to 

213 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

percentages  based  upon  those  of  1860  as  the  unit.  The 
figures  showed  that  when  wages  were  reduced  to  a  gold 
basis,  they  averaged  in  1840  87.7  per  cent,  of  the  wages  of 
1860.  Then  came  the  period  of  greenback  issues  during 
the  Civil  War,  when  wages  in  paper  were  high,  but  rep- 
resented only  66.2  per  cent,  in  gold  of  the  rates  of  1860. 
The  upward  movement  was  rapid  as  the  premium  on 
gold  fell,  and  the  gold  wages  of  1872,  when  prices  were 
also  high,  were  152.2  per  cent,  of  those  of  1860.  There 
was  a  fall  during  the  years  of  depression  that  carried, 
wages  as  low  as  135.2  in  1876,  but  even  at  this  time, 
their  purchasing  -  power  was  probably  quite  as  large 
as  in  1872,  because  of  the  fall  in  prices  of  nearly 
all  manufactured  articles  and  of  other  necessaries  of 
life. 

After  the  resumption  of  specie  payments  began  a  new 
upward  movement  in  gold  wages,  which  carried  them  in 
1880  to  141.5  per  cent,  of  the  rates  of  1860,  to  158.9  per 
cent,  for  1890,  and  to  103.43  per  cent,  of  the  wages  of  1891 
for  the  year  1900.  This  upward  movement  of  wages 
went  on  while  the  average  working-hours,  which  were 
11.4  in  1840,  fell  to  eleven  hours  in  1860,  to  ten  and  a  half 
hours  in  1870,  to  10.3  in  1880,  and  to  ten  hours  in  1889. 
This  was  the  average  of  all  leading  mechanical  industries, 
including  some  in  which  long  hours  still  prevail,  but 
others  in  which  the  time  has  fallen  considerably  below 
ten  hours  a  day.  Comparing  the  hours  of  labor  with  the 
rate  of  wages,  it  appears  that  the  amount  of  money  now 
paid  is,  substantially,  twice  that  paid  half  a  century  ago 
for  a  day  which  is  at  least  thirteen  per  cent,  shorter  than 
that  under  the  smaller  wages. 

From  the  increased  efficiency  of  labor  has  resulted, 
in  spite  of  shorter  hours,  a  larger  quantity  of  products 
to  be  distributed.  This  in  itself,  according  to  the  quan- 
tity theory  of  money,  should  cause  a  fall  in  gold  prices 
because  of  the  increased  quantity  of  goods  to  be  measured 
in  gold.  A  serious  modifying  factor,  however,  in  any 

214 


THE    RELATION    OF    MONEY    TO    PRICES 

such  connection,  would  be  the  increased  efficiency  of  the 
means  of  transferring  gold  and  credit.  The  extent  to 
which  economies  in  the  use  of  gold  have  by  modern  meth- 
ods been  introduced  into  banking  by  deposit  accounts, 
the  check  system,  and  clearings  must  be  reserved  for 
consideration  under  the  head  of  banking.  It  is  sufficient 
to  observe  that  these  changes  have  reduced  the  demand 
for  gold  to  a  very  small  percentage  of  the  total  demand 
for  currency  and  a  still  smaller  percentage  of  the  total 
demand  for  means  of  payment.  Gold  has  come  to  be 
required  chiefly  for  cash  payments  of  small  amount  in 
retail  trade  and  for  bank  reserves. 

The  influence  of  credit  in  introducing  variations  into 
the  relation  of  gold  to  goods  has  been  discussed  in  the 
previous  chapter.  It  may  be  noted  here,  however,  as  a 
consideration  modifying  the  old  relations  between  gold 
and  goods,  that  the  efficiency  of  a  given  sum  of  gold  has 
been  greatly  increased  in  international  trade  as  well  as  in 
domestic  trade.  This  increase  in  efficiency  in  interna- 
tional trade  is  the  result  of  the  use  of  the  cable,  the  tele- 
graph, and  the  telephone.  A  credit  granted  to  a  New 
York  house  by  one  in  Paris,  for  instance,  may  be  employ- 
ed several  times  if  covered  by  transactions  in  the  opposite 
direction,  during  the  period  in  which  it  might  have  been 
employed  only  once  a  generation  or  two  ago.  Even  where 
the  mail  is  employed,  or  direct  shipments  of  gold  are  made, 
the  increased  speed  of  ocean  steamers  materially  reduces 
the  charge  for  interest  on  gold  in  process  of  shipment  and 
shortens  the  time  which  transfers  it  from  the  command  of 
one  market  to  that  of  another.  The  effect  of  fast  ocean 
freights  and  international  railways  upon  the  transporta- 
tion of  goods  has  also  been  felt  in  its  influence  upon  the 
distribution  of  goods  and  the  organization  of  markets. 
Not  only  can  a  given  product  be  moved  more  quickly  to 
the  market  for  which  it  is  intended,  but  it  is  no  longer 
necessary  to  hold  large  stocks  of  goods  in  central  markets 
to  the  extent  that  was  required  before  transportation  be- 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

came  prompt  and  cheap.     A  case  in  point  is  that  related 
by  Wells:1 

"As  a  rule,  also,  stocks  of  Indian  produce  are  now  kept, 
not  only  in  the  countries,  but  at  the  very  localities  of 
their  production,  and  are  there  drawn  upon  as  they  are 
wanted  for  immediate  consumption,  with  a  greatly  reduced 
employment  of  the  former  numerous  and  expensive  in- 
termediate agencies.  Thus,  a  Calcutta  merchant  or  com- 
mission agent  at  any  of  the  world's  great  centres  of  com- 
merce contracts  through  a  clerk  and  the  telegraph  with  a 
manufacturer  in  any  country — it  may  be  half  round  the 
globe  removed — to  sell  him  jute,  cotton,  hides,  spices, 
cutch,  linseed,  or  other  like  Indian  produce.  An  inevi- 
table steamer  is  sure  to  be  in  an  Eastern  port,  ready  to 
sail  upon  short  notice ;  the  merchandise  wanted  is  bought 
by  telegraph,  hurried  on  board  the  ship,  and  the  agent 
draws  for  the  price  agreed  upon,  through  some  bank  with 
the  shipping  documents." 

It  is  obvious  that  arrangements  like  these  so  promote 
the  transfer  of  goods  that  even  if  gold  were  held  to  pay 
for  a  given  consignment,  the  time  in  which  it  would  be  thus 
held  would  be  greatly  diminished.  As  a  matter  of  fact, 
improvements  in  methods  of  credit  almost  obviate  the 
necessity  for  employing  gold.  Such  transactions  may  be 
large  or  they  may  be  small  from  month  to  month,  without 
changing  the  quantity  of  gold  held  in  a  London  or  Calcutta 
bank  as  a  protection  against,outstanding  credits.  If  the 
amount  of  such  credits  is  large,  they  may  reach  the  entire 
amount  considered  prudent  by  the  management  of  the 
bank  in  relation  to  its  stock  of  gold ;  but  on  the  other  hand, 
if  they  fall  off,  through  causes  having  no  relation  to  the 
gold  stock,  the  reserve  of  the  bank  in  London  or  Calcutta 
is  likely  to  remain  almost  unchanged.  Only  by  the 

1  Recent  Economic  Changes,  p.  31.  How  the  modern  organiza- 
tion of  industry  and  transportation  has  equalized  the  prices  of 
grain  and  obviated  the  necessity  for  hoarding  is  set  forth  by 
Jannet,  Le  Capital  au  XIX*  Stide,  p.  210. 

216 


THE    RELATION    OF    MONEY   TO    PRICES 

greater  marginal  utility  of  this  gold  at  some  point  where 
business  activity  is  greater,  may  a  demand  arise  for  its 
transfer  to  another  centre  where  it  can  earn  an  income  by 
its  employment  as  a  reserve. 

The  many  facts  which  have  been  cited  are  not  in  them- 
selves a  demonstration  that  the  value  of  gold  does  not 
move  up  and  down  in  proportion  to  the  quantity  of  goods 
exchanged  in  the  market-places.  They  tend,  however,  to 
establish  the  proposition  that  averages  of  prices  obtained 
by  index  numbers  from  a  mass  of  commodities  constantly 
shifting  in  quantity  in  proportion  to  one  another,  in  quality, 
and  in  relations  of  supply  and  demand  in  one  place  and 
another,  cannot  afford  a  mathematical  index  of  the  value 
of  gold  arising  from  changes  in  the  quantity  of  gold.  As 
Fiamingo  points  out: 1 

"It  is  apparent  that  the  variation  in  the  purchasing- 
power  of  money  is  a  consequence,  an  effect,  of  obscure 
and  complex  causes.  The  total  index  number  gives  us, 
then,  the  effect  measured  in  money,  of  all  the  technical, 
industrial  processes,  and  of  all  other  causes  which  have 
determined  the  changes  in  price  of  the  enumerated  com- 
modities. If  the  index  number  shows  an  increase  in  the 
purchasing-power  of  money,  it  is  an  effect,  a  consequence 
of  these  factors,  and  the  decline  in  the  prices  of  com- 
modities is  due  to  those  varied  and  complex  causes." 

Changes  in  prices  of  commodities  constantly  take  place 
from  causes  related  to  commodities,  to  changes  in  fashions 
and  tp  political  and  economic  events,  rather  than  to 
causes  related  to  the  money  supply.  Only  by  a  process  of 
inversion  can  it  be  properly  said  that  a  change  in  com- 
modity prices  under  such  conditions  is  caused  by  changes 
in  the  value  of  money.  The  ratios  of  price  may  have 
changed,  but  from  causes  related  to  commodities  rather 
than  those  related  to  money.  During  the  Crimean  War 
the  price  of  wool  went  up,  and  during  the  blockade  of  the 

1  Journal  of  Political  Economy  (December,  1898),  VII.,  p.  75. 

217 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

Southern  ports  of  the  United  States  in  the  Civil  War 
cotton  increased  to  two  or  three  times  its  usual  value. 
Fiamingo  correctly  declares  that  "money  in  these  cases 
measures  the  economic  effect  which  the  Crimean  or  the 
United  States  war  has  on  wool  or  on  cotton,  but  this  ec- 
onomic phenomenon  is  absolutely  independent  of  money 
and  its  measure."  Sir  James  Steuart  showed  early  ap- 
preciation of  the  complicated  phases  of  the  problem  of 
prices.  He  regarded  the  forces  acting  upon  prices  as  of 
three  sorts:1 

"Those  exerted  by  demand,  supply,  and  the  interaction 
between  the  two,  or  competition.  These  forces  he  classi- 
fied as  '(0  the  abundance  of  the  things  to  be  valued; 
(2)  the  demand  which  mankind  make  for  them;  (3)  the 
competition  of  the  demanders,  and  (4)  the  extent  of  the 
faculties  of  the  demanders.'  From  these  general  princi- 
ples, he  concluded  that  the  specie  of  any  country  might, 
therefore,  be  'augmented  or  diminished  in  ever  so  great 
a  proportion,  commodities  will  still  rise  and  fall  according 
to  the  principles  of  demand  and  competition  and  these 
will  constantly  depend  upon  the  inclination  of  those  who 
have  property  or  any  kind  of  equivalent  whatsoever  to 
give,  but  never  upon  the  quantity  of  coin  they  are 
possessed  of.'" 

The  most  serious  difference  between  the  advocates  of 
the  quantity  theory  and  those  who  oppose  it  is  not  so 
much,  perhaps,  over  facts  as  over  the  question  of  their 
causation.  Few  deny  that  where  there  is  a  great  quantity 
of  gold  prices  are  usually  higher  than  they  would  be  for 
the  same  quantity  of  goods  with  a  much  smaller  quantity 
of  gold.  But  it  is  possible  to  argue  that  the  rise  of  prices 
is  due  to  expansion  of  credit  and  that  this  rise  of  prices  is 
the  influence  which  attracts  the  amount  of  gold  required 

1  Inquiry  -into  the  Principles  of  Political  Economy,  I.,  p.  400. 
This  summing  up  of  his  position  is  from  the  article  of  Willis,  "  His- 
tory and  Present  Application  of  the  Quantity  Theory,"  in  Journal 
of  Political  Economy  (September,  1896),  IV.,  p.  423. 

218 


THE    RELATION    OF    MONEY    TO    PRICES 

for  carrying  on  transactions.  This  makes  gold  follow  the 
variations  of  prices  instead  of  causing  them.  The  manner 
in  which  the  change  is  interpreted  by  the  advocates  of  the 
quantity  theory  in  its  crude  form  is  diametrically  opposite 
— that  the  quantity  of  gold  determines  the  movement  of 
prices,  not  that  prices  determine  the  movement  of  gold. 
There  is  probably  some  truth  in  both  views  under  differing 
circumstances.  As  between  two  given  countries,  the  one 
where  credit  is  expanding  and  business  is  active  will  tend 
to  draw  to  itself  from  the  existing  stock  such  an  amount 
of  gold  as  is  necessary  for  carrying  on  its  transactions.  In 
the  gold-using  world  as  a  whole,  however,  change  in  the 
absolute  quantity  of  gold  in  existence  will  enter  into  the 
many  influences  acting  upon  average  prices  throughout 
the  world  (if  such  a  world-average  is  conceivable)  with  a 
tendency  to  raise  those  prices  which  are  most  sensitive 
if  there  is  a  marked  increase  of  gold  and  to  depress  them 
if  there  is  a  marked  decrease  of  gold.  The  problem  is  so 
complex  that  it  is  doubtful  if  any  amount  of  research 
would  permit  reducing  it  to  a  mathematical  basis.  All 
that  can  be  asserted — and  even  that  rather  as  a  deduction 
from  general  tendencies  than  as  a  demonstrated  fact — is 
the  rule  of  the  quantitative  theory  stated  by  Dubois :  * 

"The  quantitative  theory  of  prices  should  be  set  forth 
in  this  fashion:  In  assuming  to  be  unchanged  the  rapid- 
ity of  the  circulation  6f  money,  the  development  of  credit 
and  of  means  of  payment  without  the  intervention  of 
money,  as  well  as  the  mass  of  exchanges  thereby  affected, 
a  variation  in  the  quantity  of  money  of  some  importance 
(suffisamment  forte)  in  relation  to  the  stock  previously 
existing  will  tend  to  produce  an  inverse  variation  of  the 
purchasing-power  of  money." 

It  is  on  the  side  of  demand  for  gold  that  the  greatest 
variations  occur  in  its  relation  to  the  value  of  goods. 
The  demand  varies  greatly  with  changes  in  conditions  of 

1  Precis  de  VHistoire  des  Doctrines  Economiquts,  p.  190. 
2J9 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

credit.  In  a  period  of  expanding  credit,  the  demand  is 
not  primarily  a  demand  for  gold  but  for  capital.  Gold 
operates  simply  as  the  safety-valve,  which  is  designed  to 
insure  not  only  a  sufficient  supply  of  the  medium  of  ex- 
change in  daily  transactions,  but  such  a  relation  between 
prices  of  different  commodities  as  shall  at  a  certain  point 
check  overproduction.  It  is  when  such  overproduction 
reaches  the  point  that  prices  of  goods  fall  seriously  that 
gold  serves  a  useful  purpose  as  a  standard.  It  is  in  such 
cases  more  a  standard  of  relative  Values  than  of  absolute 
values,  because  those  articles  which  have  been  overpro- 
duced fall  in  price,  not  simply  in  relation  to  gold,  but  in 
relation  to  articles  for  which  there  is  a  greater  demand. 
Gold  is  the  one  article  which  is  always  in  demand  in  all 
gold-standard  countries  and  which,  therefore,  acquires  d 
peculiar  value  when  other  articles  become  less  exchange- 
able. The  manufacturer  who  is  selling  steel  rails  or 
cotton  goods  as  fast  as  he  can  produce  them  finds  them  as 
good  as  money.  It  is  only  when  he  finds  that  he  cannot 
sell  them  at  his  usual  profit  that  they  cease  to  be  valuable 
in  his  hands  and  he  then  turns  to  money  as  the  one 
article  whose  value  is  unquestioned  and  which  is  always 
exchangeable  for  what  he  needs.  Hence  come  the  great 
fluctuations  in  the  demand  for  money,  which  are  much 
more  important  in  affecting  its  exchange  value  than  the 
slight  annual  changes  in  the  new  supply. 

From  these  considerations  emerges  the  conclusion  that 
such  mathematical  relationship  as  exists  between  the 
quantity  of  gold  and  prices,  or  between  the  quantity  of 
currency  and  prices,  is  in  actual  transactions  so  obscured 
by  other  factors  that  it  cannot  be  ascertained  correctly, 
or  revealed  conclusively,  by  tables  of  prices  of  commodi- 
ties. When  additions  to  the  stock  of  metallic  money  are 
large  and  permanent  they  act  finally,  in  some  degree, 
upon  prices;  but  this  action  cannot  be  exactly  measured 
by  any  rule  of  mathematics,  and  is  often  less  potent  than 
many  other  influences  which  affect  commodities.  It  re- 

220 


THE    RELATION    OF    MONEY    TO    PRICES 

quires,  says  Leroy-Beaulieu,  "a  very  long  time  for  the  in- 
crease of  the  money  supply  to  traverse  all  the  channels  of 
circulation  and  produce  a  general  and  uniform  elevation 
of  the  level  of  prices."  *  It  has  already  been  shown  that 
this  elevation  of  prices  can  never  become  uniform,  be- 
cause the  first  effects  of  expanding  credit  resulting  from 
an  increase  in  bank  reserves  are  felt  upon  those  com- 
modities whose  prices  are  most  sensitive,  and  thereby 
cause  a  readjustment  of  the  relations  of  demand  and 
supply  between  other  commodities,  of  which  gold  is  only 
one.  The  true  law  governing  the  demand  for  metallic 
money  is  well  stated  by  Kinley : 3 

"At  any  moment  the  value  of  the  standard  money  is 
fixed  by  the  interplay  of  competition  between  buyers  and 
sellers  of  gold ;  but  it  is  a  competition  to  buy  and  sell,  not 
gold  in  general,  but  a  definite  amount,  a  definite  supply. 
The  demand  is  not  for  an  amount  sufficient  to  settle  all 
exchanges,  but  sufficient  only  for  the  settlement  of  the 
balance  of  exchanges.  Now  the  same  balance  may  rep- 
resent very  different  total  volumes  of  exchanges,  at  dif- 
ferent times,  on  the  same  price  level.  That  is  to  say,  the 
demand  for  money  for  immediate  payment  may  remain 
the  same  for  very  different  volumes  of  business,  or  it  may 
be  larger,  or  smaller,  for  the  same  volume  of  business  at 
different  times." 

1  Traitt  d' Economic  Politique,  III,  p.  151.         a  Money,  p.  146. 


A  means  of  discharging  debts  due  abroad — How  exchange  pre- 
vents needless  counter-shipments  of  gold — Value  of  bills  of 
exchange  subject  to  rule  of  supply  and  demand — Usually 
within  the  limits  of  the  cost  of  shipping  gold — Meaning  of 
"par  of  exchange" — Difference  between  commercial  bills  and 
bankers'  bills — Why  the  larger  proportion  of  bills  is  drawn  on 
London — Arbitrage  and  indirect  exchange. 

FOREIGN    exchange   is  the  system  by  which  traders 
of  different  nations  discharge  their  debts  to  one  an- 
other.    In  the  more  technical  sense  the  term  is  limited 
to  settlements  made  by  means  of  bills  of  exchange. 

A  bill  of  exchange  is  an  order  by  one  person  to  another 
in  a  different  place  to  pay  money  to  a  third.  The  term 
is  sometimes  used  for  similar  transactions  between  dif- 
ferent places  in  the  same  country.  Such  an  operation  in 
the  United  States  is  called  domestic  exchange  and  in 
Great  Britain  inland  exchange.  In  the  United  States 
most  references  to  exchange,  without  any  qualifying 
words,  refer  to  foreign  exchange,  which  involves  transac- 
tions between  persons  in  different  countries.1  The  def- 
inition given  by  Goschen,  the  author  of  the  first  classic 
work  on  the  foreign  exchanges,  is  this:2 

'The  term  "bills  of  exchange"  is  still  widely  used  in  Great 
Britain  fur  inland  bills.  Thus  Rae  has  a  chapter  on  "Bills  of 
Exchange"  almost  wholly  devoted  to  this  subject  (Tlte  Country 
Banker,  p.  238);  and  Easton  says,  "Bills  are  drawn  on  London 
from  every  quarter  of  the  Kingdom"  (Banks  and  Banking,  p.  167). 

1  The  Theory  of  the  Foreign  Exchanges,  p.  2. 

222 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

"That  which  forms  the  subject  of  exchange  is  a  debt 
owing  by  a  foreigner  and  payable  in  his  own  country, 
which  is  transferred  by  the  creditor  or  claimant  for  a 
certain  sum  of  money  to  a  third  person,  who  desired  to 
receive  money  in  that  foreign  country,  probably  in  order 
to  assign  it  over  to  a  fourth  person  in  the  same  place,  to 
whom  he  in  his  turn  may  be  indebted." 

Stripped  of  technicalities,  the  use  of  bills  of  exchange 
serves  a  similar  purpose  to  the  use  of  checks  in  obviating 
the  necessity  for  transferring  money.  It  is  a  method  of 
charging  off  obligations  of  persons  in  different  nations  to 
one  another,  just  as  banking  credits  are  means  of  clearing 
such  obligations  at  home,  in  such  a  manner  as  to  reduce 
to  a  minimum  the  transfer  of  actual  money.  If  the  entire 
volume  of  exports  from  the  United  States,  amounting 
in  the  fiscal  year  1905  to  $1,518,000,000,  had  to  be  paid 
for  in  money  it  would  be  necessary  to  send  that  amount 
of  money  across  the  ocean,  while  if  the  imports  into  the 
United  States,  amounting  to  $1,117,000,000  were  paid 
for  in  the  same  way,  a  large  counter  -  current  of  money 
would  be  flowing  in  the  opposite  direction.  These  ship- 
ments of  money,  moreover,  would  have  to  be  made  in 
gold  coin  rather  than  in  any  form  of  government  paper  or 
bank-notes,  because  gold  is  the  only  money  of  full  intrinsic 
value  and  acceptable  in  commercial  countries. 

It  is  obvious  that  these  counter-shipments  of  gold  would 
be  wasteful  and  unnecessary.  They  would  absorb  a  great 
quantity  of  money  upon  which  interest  would  be  lost,  and 
they  would  be  subject  to  the  costs  and  exposed  to  the  usual 
risks  of  transit  by  sea.  As  between  one  country  and  an- 
other, if  the  transactions  could  be  brought  to  a  common 
market,  it  would  only  be  necessary  at  most  that  the 
balance  should  be  settled  in  gold.  But  the  persons  who 
import  goods  from  Europe  are  not  usually  the  same  as 
those  who  export  goods  to  Europe,  and  those  to  whom 
goods  are  exported  are  not  the  same  as  those  from  whom 
goods  are  bought.  The  bill  of  exchange,  therefore,  comes 

223 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

into  use  as  a  means  of  transferring  titles  to  money  without 
the  physical  delivery  of  it.  What  is  required  ultimately 
by  the  creditor  is  payment  in  the  money  of  his  own  coun- 
try. The  title  to  such  money  is  what  the  debtor  buys 
through  the  processes  of  foreign  exchange.  In  the  words 
of  Georges-be*  vy,  exchange  is  "the  operation  which  trans- 
forms the  money  of  one  country  into  that  of  another 
country."  * 

The  simplest  form  of  a  foreign  exchange  transaction 
would  be  the  case  where  a  person  who  had  become  en- 
titled to  money  by  selling  goods  to  a  foreign  purchaser 
should  draw  an  order  upon  that  purchaser  for  the  amount 
due  for  the  goods.  If  this  order  is  bought  by  a  person 
who  owes  money  abroad  for  imported  goods,  the  latter  is 
able  to  remit  the  order  to  the  person  from  whom  he  has 
bought.  This  person  has  then  only  to  present  the  order 
in  his  own  country,  and  usually  in  his  own  city,  to  the 
person  upon  whom  it  is  drawn — the  buyer  of  goods  from 
the  exporting  country.  Thus  the  counter-obligations  be- 
tween the  two  countries  are  settled  by  charging  one  off 
against  the  other  and  transferring  such  claims  to  the  per- 
sons ultimately  entitled  to  money. 

The  operation  of  bringing  together  buyer  and  seller  of 
bills  of  exchange  is  naturally  performed  through  banking 
houses.  Otherwise  the  person  who  had  a  bill  to  sell  would 
not  know  where  to  readily  find  a  buyer,  and  a  person  who 
desired  to  buy  a  bill  to  settle  an  obligation  abroad  would 
not  know  where  he  could  find  it.  Dealing  in  bills  of  ex- 
change is,  therefore,  a  regular  profession,  sometimes  pur- 
sued by  classes  engaged  in  few  other  forms  of  business  and 
sometimes  as  an  incident  to  other  branches  of  banking. 

Bills  of  exchange,  being  a  substitute  for  money  in  the 
settlement  of  international  balances,  are  subject  to  the 
condition  governing  other  commodities  —  the  rule  of 
supply  and  demand.  If  such  bills  are  plentiful  in  rela- 

1  Melanges  Financiers,  p.  102. 
324 


THE    PRINCIPLES    OP    FOREIGN    EXCHANGE 

tion  to  the  demand  for  them  their  price  falls ;  if  they  are 
scarce,  their  price  rises.  An  excess  of  bills  of  exchange 
arises  fundamentally  from  an  excess  of  exports  from  the 
country  where  they  are  drawn;  a  scarcity  arises  from  an 
excess  of  imports.  Many  other  elements,  as  we  shall  see, 
enter  into  the  problem  of  the  relative  demand  for  bills,  but 
for  the  sake  of  simplicity  in  illustrating  the  theory,  it  may 
be  assumed  that  the  demand  for  bills  depends  upon  the 
balance  of  foreign  trade.  In  the  figures  given  above  for 
the  trade  of  the  United  States  in  1905,  there  would  be  a 
large  offering  in  New  York  of  bills  on  London  and  their 
price  in  American  money  would  fall,  while  in  London  there 
would  be  a  relative  scarcity  of  bills  on  New  York  and  their 
price  would  rise. 

The  terms  "rise"  and  ".fall"  are  here  used  on  the  as- 
sumption that  drafts  expressed  in  foreign  money  are 
quoted  in  terms  of  the  money  of  the  country  where  they 
are  sold.  This  is  the  case  with  drafts  upon  London  sold  in 
New  York.  A  rise  in  exchange  implies  that  it  requires  an 
increased  amount  of  American  money  to  buy  a  pound 
sterling;  a  fall  in  exchange  implies  that  it  requires  a  less 
amount.  In  London,  however,  this  method  of  quoting 
the  exchanges  is  not  usually  followed,  but  exchange  with 
foreign  countries  is  expressed  in  the  currency  of  those 
countries.  This  reverses  the  significance  of  terms  and 
makes  a  rising  exchange  favorable  to  London  and  a  low 
exchange  unfavorable;  because  a  high  exchange  means 
that  more  foreign  currency  can  be  bought  with  an  English 
pound  sterling.  It  is  necessary  therefore,  in  interpreting 
references  to  the  state  of  the  exchanges,  to  know  the  point 
of  view  from  which  they  are  made. 

If  bills  of  exchange  were  the  only  method  of  settling 
international  balances,  those  who  had  them  to  sell  might 
fix  any  price  determined  by  the  demand  on  the  one  hand 
and  the  supply  on  the  other.  There  are,  however,  natural 
limits  to  the  prices  which  can  thus  be  obtained.  These 
limits  are  established  by  the  cost  of  shipping  gold.  If 
i.-is  225 


THE   PRINCIPLES    OF  MONEY  AND  BANKING 

brokers  should  arbitrarily  charge  for  bills  of  exchange  a 
price  not  warranted  by  the  conditions  of  the  market,  the 
option  would  lie  with  the  person  having  a  debt  to  settle 
abroad  to  send  gold,  which  would  be  accepted  by  his 
creditor  as  readily  as  a  bill.  It  would  be  necessary  to  ob- 
tain the  gold,  to  have  it  properly  boxed,  to  secure  insur- 
ance against  its  loss,  to  pay  the  other  proper  costs  of  ship- 
ment, and  to  consider  the  loss  of  interest  while  the  money 
was  in  transit.  As  these  charges  are  nearly  uniform  be- 
tween given  points  and  can  be  easily  ascertained,  they 
form  a  limit  upon  the  price  of  bills  of  exchange  beyond 
which  dealers  in  them  cannot  go  in  fixing  their  charges. 
An  excessive  supply  of  bills  may  depress  the  price  obtained 
for  them  to  such  a  point  that  a  man  having  a  debt  due 
from  abroad  will  prefer  to  pay  the  cost  of  having  gold 
shipped  to  him.  A  deficient  supply  of  bills,  after  raising 
their  price  to  the  same  amount  as  the  cost  of  shipping 
gold,  may  compel  the  actual  shipment  of  gold  to  meet  the 
obligation.  Between  two  gold-standard  countries,  these 
limits  are  pretty  nearly  fixed  by  the  cost  of  gold  shipments. 
Par  of  exchange  expresses  the  relations  between  the 
mint  weights  of  the  standard  coin  of  different  countries 
which  employ  the  same  metal  for  their  standard  money. 
Theoretically,  par  of  exchange  would  arise  from  an  exact 
balance  of  payments,  but  practically  such  an  exact  balance 
seldom  exists  and  could  not  be  accurately  ascertained  if 
it  did  exist.  Par  of  exchange  simply  constitutes  the  pivot 
around  which  the  exchange  fluctuates  upward  or  down- 
ward according  to  the  relations  of  demand  and  supply 
for  bills.1  Par  of  exchange  between  London  and  New 


1  A  simple  case  of  theoretical  par  exists  between  England  and 
Australia,  because  the  unit  of  value  of  each  is  the  gold  sovereign 
of  the  same  weight  and  fineness;  but  this  is  very  far  from  implying 
that  £100  in  one  country  will  purchase  a  bill  for  j£ioo  on  the 
other,  even  when  merchandise  shipments  are  evenly  balanced, 
for  the  loss  of  interest  during  the  transmission  of  the  bill  has  to 
be  considered. — Vide  Clare,  p.  17. 

226 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

York  is  $4.866.  This  means  that  $4.866  in  United  States 
gold  coin  contains  the  same  amount  of  gold  bullion  as  a 
pound  sterling  in  British  gold  coin.  The  par  of  exchange 
between  Paris  and  London  is  25.22  francs  to  the  pound 
sterling,  and  the  par  of  the  German  exchange  on  London  is 
20.43  marks  to  the  pound  sterling.  These  parities  depend 
on  the  legal  weight  of  new  coins  and  are  modified  in  prac- 
tice if  a  country  permits  its  gold  coinage  to  deteriorate  by 
wear. 

There  can  be  no  fixed  par  of  exchange  between  coun- 
tries having  different  metals  for  their  currency  standards. 
There  is  a  definite  par  between  the  legal  mint  weights  of 
the  standard  coins  in  gold-standard  countries,  but  there 
can  be  no  such  fixed  par  between  gold  and  silver  countries, 
gold  and  paper  countries,  or  silver  and  paper  countries 
Their  exchange  necessarily  fluctuates  according  to  the  re- 
lations of  gold  to  silver  or  to  paper  currency,  without  any 
fixed  limits.  Thus  the  fluctuations  of  exchange  between 
London  and  New  York  since  both  countries  have  been 
upon  the  gold  standard  could  not  be  materially  greater 
than  from  $4.835  in  American  currency  for  the  pound 
sterling  to  $4.895,  a  difference  of  less  than  one  and  a 
quarter  per  cent.,  representing  the  cost  of  shipping  gold 
both  ways.  Between  New  York  and  Mexico,  however, 
while  the  latter  country  was  on  a  silver  basis,  in  1903, 
the  fluctuations  were  from  2.65  pesos  to  2.18  pesos  for 
one  dollar,  the  difference  of  more  than  twenty  per  cent, 
between  the  two  extremes  representing  the  changes  in  the 
gold  value  of  silver  in  addition  to  the  mere  cost  of  shipping 
money  between  the  two  cities.  There  being  no  fixed 
price  in  gold  for  silver  bullion,  there  is  obviously  no 
point  in  the  relationship  between  the  moneys  of  the  two 
countries  which  can  be  considered  as  an  even  theoretical 
par  of  exchange. 

While  the  par  of  exchange  is  a  theoretical  conception, 
which  cannot  be  demonstrated  to  depend  upon  exact 
equality  of  payments,  there  is  no  doubt  that,  other  in- 

227 


THE    PRINCIPLES    OF  MONEY  AND  BANKING 

fluences  being  the  same,  such  a  par  is  most  likely  to  be 
attained  when  the  supply  of  bills  offered  in  one  country 
upon  another  about  equals  the  supply  offered  on  the 
other  side.  When  there  is  an  excess  of  payments  to  be 
made  by  one  country  over  the  amounts  due  to  that  coun- 
try, the  demand  for  bills  is  likely  to  exceed  the  supply 
and  to  raise  the  rate  of  exchange.  When  the  bills  have 
been  absorbed,  it  then  becomes  necessary  to  export  gold. 
How  this  condition  operates  is  thus  set  forth  by  Straker:  * 

"Let  us  suppose  that  as  a  result  of  the  aggregate  deal- 
ings between  France  and  England,  France  at  one  period 
owes  us  more  than  we  owe  her.  Now  it  will  be  apparent 
that  in  the  settlement  of  the  transactions  comprised  in 
the  aggregate,  the  merchants  in  France  will  find  a  diffi- 
culty in  procuring  sufficient  drafts  to  settle  all  their  in- 
debtedness, and  consequently  there  will  be  a  likelihood 
of  some  of  the  merchants  there  having  to  send  gold  and 
bear  the  cost  of  remittance.  Hence  there  will  be  com- 
petition among  them  to  obtain  what  bills  are  offering — 
demand  will  exceed  supply — and  rather  than  be  forced  to 
send  gold,  buyers  of  drafts  on  London  will  be  willing  to 
pay  more  for  them  than  the  face  value  represented; 
that  is,  they  will  be  willing  to  pay  more  than  mint  par." 

The  point  at  which  the  cost  of  shipping  gold  is  no  more 
than  the  price  of  bills  of  exchange  is  called  the  "gold 
point."  The  same  term  is  applicable  to  the  movement 
in  the  other  direction,  when  the  price  of  bills  falls  so  low 
that  it  is  more  profitable  to  accept  gold.  One  is  the 
export  gold  point ;  the  other  is  the  import  gold  point,  but 
in  practice  the  relation  of  the  gold  point  to  the  price  of 
bills,  whether  they  are  high  or  low,  carries  its  significance 
so  plainly  to  the  expert  that  in  ordinary  discussion  he  does 
not  feel  the  necessity  of  using  the  qualifying  phrase. 
When  the  cost  of  bills  on  London  and  New  York,  for 
instance,  rises  gradually  from  par  at  $4.866  towards 

1  The  Money  Market,  p.  130. 
228 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

$4.895,  which  is  about  the  gold  export  point,  the  ex- 
change dealer  and  his  customers  understand  that  "the 
gold  point"  means  that  gold  is  likely  to  be  exported 
from  New  York  when  this  point  is  actually  reached. 
On  the  other  hand,  when  the  price  of  bills  falls  from  par 
towards  $4.835,  reference  to  the  impending  "gold  point" 
means  that  when  it  is  reached  gold  is  likely  to  be  imported. 

A  large  demand  for  bills  of  exchange,  therefore,  arises 
from  heavy  obligations  to  be  settled  abroad  and  a  small 
supply  of  bills  arises  from  limited  obligations  due  abroad.1 
The  balance  theoretically  has  to  be  settled  by  the  trans- 
fer of  gold.  The  normal  bill  of  exchange  is  based  upon 
business  transactions.  These  transactions  inevitably  in- 
clude many  items  besides  the  export  and  import  of  com- 
modities. They  include  payments  for  freight,  insurance, 
commissions,  and  other  charges  connected  with  the  ship- 
ment of  goods.  They  included  also  remittances  of  inter- 
est due  by  borrowers  in  one  country  upon  the  securities 
which  they  have  sold  to  lenders  in  another  country.2 

Assuming,  for  the  sake  of  simplicity,  that  one  country, 
as  Great  Britain,  had  a  claim  against  the  United  States 
for  $80,000,000  for  goods  exported,  and  that  the  United 
States  had  a  claim  against  Great  Britain  of  $100,000,000 
for  goods  exported,  equality  in  exchange  transactions 
might  be  reached  by  the  fact  that  American  merchants 
owed  to  British  ship-owners  $10,000,000  for  freights  and 

1  Sykes  calls  attention  to  the  fact  that  "It  is  the  debts  which 
are  in  the  process  of  being  paid  which  affect  the  exchanges,  but 
the  total  indebtedness  of  either  country  may  not  affect  the  ex- 
changes in  any  way.  Most  nations  are  indebted  to  England  owing 
to  the  investment  of  English  capital  abroad,  and  though,  as  we 
shall  see,  the  payment  of  the  interest  on  such  investments  has  an 
important  bearing  on  the  rate  of  exchange,  yet  the  capital  sums 
do  not  affect  the  rates  except  at  the  time  they  are  borrowed  or 
repaid." — Banking  and  Currency,  p.  195. 

7  Nicholson  classifies  a  freight  payment  as  "an  invisible  export" 
and  an  investment  as  "an  import  of  securities  from  the  foreigner," 
to  be  paid  for  in  commodities. — Bankers'  Money,  p.  26. 

229 


THE    PRINCIPLES   OF  MONEY  AND  BANKING 

similar  charges  and  owed  to  British  capitalists  $10,000,- 
ooo  for  interest  on  their  investments  in  American  securi- 
ties. Under  such  a  condition  of  the  exchanges  a  quantity 
of  commercial  bills  on  London  would  be  thrown  upon  the 
New  York  market  which  would  exactly  meet  the  demand 
for  bills  for  all  purposes.1  Under  such  circumstances  the 
price  of  exchange  should  be  near  par  in  each  country. 

It  by  no  means  follows,  however,  that  absence  of 
equality  of  payments  causes  immediate  movements  of 
gold.  The  bills  originating  in  movements  of  merchandise 
are  known  as  commercial  bills.  They  are,  in  the  case 
assumed,  bills  drawn  against  merchandise  actually  ex- 
ported from  New  York  to  Great  Britain.  There  is  another 
class  of  bills  of  great  importance,  however,  which  enter 
into  the  movement  of  the  exchanges  to  still  further  econ- 
omize the  transfer  of  gold  and  to  diminish  the  successive 
shocks  which  would  come  to  the  money  market  if  the 
only  factors  were  commercial  bills  and  gold.  This  addi- 
tional factor  is  bankers'  bills  of  exchange.  These  are 
drawn  in  the  same  manner  as  commercial  bills.  They 
are  drawn  in  some  cases  against  actual  shipments  of 
gold  in  order  to  give  to  the  trader  command  over  the  gold 
which  has  been  transferred  between  the  banks.  This 
operation  may  be  thus  described : 2 

"When  gold  moves  between  countries  it  is  as  an  ar- 
ticle of  merchandise,  and  bankers'  bills  are  drawn  against 
the  movement  in  the  same  manner  as  commercial  bills 
would  be  drawn  against  a  movement  of  commodities, 
though  the  drafts  agamst  gold  would  be  payable  in  the 
briefest  possible  interval  of  time  to  save  interest  charges 

1  "On  the  New  York  market  freight  charges  figure  chiefly  on 
the  demand  side  of  London  bills,  since  a  large  part  of  the  ocean- 
carrying  trade  is  in  the  hands  of  English  ship-owners,  who  re- 
ceive their  pay  in  London  bills.  The  great  German  transporta- 
tion companies  also  have  a  large  New  York  business  which 
influences  the  demand  for  German  bills."  —  Scott,  p.  245. 

1  Foreign  Exchange,  "New  York  Financier,"  p.  19. 

230 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

which,  under  the  conditions  calling  for  such  an  unusual 
movement,  would  be  abnormally  high." 

Bankers'  bills  may  be  drawn  also  against  credits  ex- 
tended to  the  bankers  abroad.  It  is  in  this  way  that 
bankers  help  to  avert  the  unnecessary  pressure  which 
would  be  felt  upon  the  market  if  every  temporary  bal- 
ance of  payments  had  to  be  settled  by  the  shipment  of 
gold.  A  New  York  bank  which  deals  in  foreign  ex- 
change is  usually  able  to  obtain  an  open  credit  from  a 
banking-house  in  London  or  any  other  point  with  which 
it  does  business.  When  there  is  a  scarcity  of  commer- 
cial bills  on  the  market,  the  New  York  bank  is  able 
to  meet  the  demand  by  drawing  bills  against  its  credit 
abroad.  This  serves  to  make  the  supply  of  bills  equal 
to  the  demand.  Eventually  the  New  York  banker  must 
pay  in  some  manner  for  his  draft  upon  his  foreign  credit. 
He  counts  upon  doing  this  by  himself  buying  bills  of 
exchange  when  the  supply  is  in  excess  of  the  demand. 
He  thus  contributes  by  the  purchase  of  bills  as  well  as  by 
their  sale  to  temper  the  fluctuations  of  the  market  and 
keep  supply  and  demand  at  a  level.  Since  bankers' 
bills  are  usually  drawn  only  after  the  supply  of  commer- 
cial bills  has  been  exhausted  (or  shows  symptoms  of  ex- 
haustion) and  to  avoid  the  cost  of  shipping  gold,  they 
command  a  slightly  higher  price  than  commercial  bills.1 
The  banker,  by  delaying  the  offer  of  bills  for  sale  until 
there  is  a  scarcity,  is  able  to  obtain  a  price  approaching 
the  gold  export  point ;  by  delaying  purchase  of  bills  until 
there  is  a  manifest  excess,  he  is  able  to  purchase  at  a 
point  approaching  the  gold  import  point.  If,  at  the  time 

'"That  a  bank-draft  should  cost  more  than  a  trade-bill  is 
(quite  apart  from  the  better  standing  of  the  drawer)  only  natural, 
for  the  banker,  besides  having  to  remunerate  his  correspondent, 
either  by  paying  a  trifling  commission,  or  by  keeping  a  balance 
in  London  free  of  interest,  must  also  add  on  a  certain  percentage 
for  the  trouble  of  drawing  and  advising  the  bill,  and  providing 
cover." — Clare,  p.  29. 

231 


THE   PRINCIPLES   OF   MONEY   AND    BANKING 

he  sells  his  bill  at  a  high  price,  he  calculates  correctly  the 
time  when  he  will  be  able  to  buy  at  a  low  price,  he  makes 
a  profit  in  excess  of  the  direct  profit  represented  by  the 
cost  of  shipping  gold. 

The  employment  of  bankers'  bills  is  only  one  of  many 
factors  which  complicate  the  operation  of  the  simple 
principle  of  settling  balances  by  interchange  of  com- 
mercial bills.  There  is  a  great  variety  of  transactions 
growing  out  of  modern  financial  operations  which  require 
remittances  one  way  or  the  other  independent  of  the  ship- 
ment of  commodities.  The  payment  of  interest  on  se- 
curities is  one  of  these  factors  and  dealings  in  securities 
which  have  an  international  market  constitute  another 
factor.  The  rate  of  discount  for  money  is  also  an  im- 
portant factor  in  determining  the  profit  of  the  dealer  in 
bills  of  exchange.  A  high  rate  in  one  centre  as  compared 
with  a  low  rate  in  another  will  lead  bankers  to  buy  or  sell 
or  to  change  their  charges  according  to  the  influence  of  the 
rates  upon  final  profits.  A  New  York  banker  who  has  an 
open  credit  in  Europe  will  take  advantage  of  high  interest 
rates  in  New  York  to  sell  bills,  other  conditions  being 
favorable,  up  to  the  limit  of  his  credit.  He  will  do  this 
because  the  money  received  for  the  bills  sold  can  be  loaned 
in  the  market  at  the  high  rate  of  discount  which  prevails 
there.  He  will  have  to  pay  for  the  use  of  this  money  only 
the  rate  of  the  discount  in  the  market  on  which  the  bills 
are  drawn,  plus  perhaps  a  small  commission,  so  that  there 
will  be  a  profit  amounting  to  the  difference  in  the  rates. 
This  profit  will  go  to  the  banker  who  sells  the  bills  or  will 
be  divided  between  him  and  the  institution  on  which  they 
are  drawn,  according  to  the  nature  of  the  contract  between 
them.1 

1  An  operation  of  this  sort  in  which  the  risks  and  the  chances 
of  profit  are  equally  assumed  on  both  sides  is  called  a  "joint 
account."  and  sale  of  bills  by  a  banker  at  his  own  risk  and  profit 
with  a  fixed  commission  paid  for  the  privilege  of  drawing,  is  called 
a  "free  credit"  or  an  "open  account." 

233 


THE    PRINCIPLES   OF    FOREIGN    EXCHANGE 

Down  to  a  recent  date  the  comparative  excess  of  capital 
in  Europe  seeking  investment  over  the  amount  of  such 
capital  in  the  United  States  has  made  the  rate  charged 
for  the  use  of  money  lower  as  a  rule  in  Europe  than  in 
America.  This  has  made  it  more  profitable  for  American 
bankers  to  sell  exchange  against  their  credits  in  Europe 
than  for  European  bankers  to  sell  on  America.  Occasion- 
ally, however,  this  process  has  been  reversed.  The  low 
rates  of  exchange  in  New  York  in  the  autumn  of  1903 
tempted  American  bankers  to  buy  bills  on  London  and  hold 
them  for  sale  at  later  dates  at  higher  prices.  The  charac- 
ter of  such  operations  was  thus  set  forth  by  a  financial 
journal:1 

"Investment  purchases  of  long  sterling  are  now  a 
feature  of  the  foreign  exchange  market  for  the  first  time 
in  several  years.  The  operation  is  the  reverse  of  that  by 
which  sterling  loans  have  been  made  so  frequently  during 
the  past  two  years.  It  consists  in  the  purchase  of  bank- 
ers' sixty  and  ninety  day  bills  for  the  purpose  of  holding 
them  until  they  run  to  sight.  The  difference  between  the 
present  rate  for  bankers'  long  bills  and  the  rate  at  which 
it  is  estimated  that  demand  sterling  can  be  sold  when 
the  bills  mature,  constitutes  the  profit  on  the  investment." 

This  extract  brings  out  the  highly  technical  character  of 
exchange  operations  and  the  factors  which  enter  into 
them.  "Long  sterling"  is  the  market  contraction  for 
bills  drawn  in  pounds  sterling  for  a  long  period.  The 
antithesis  of  "long"  bills  is  "sight"  bills  and  the  rates  of 
exchange  usually  quoted  are  for  "sight"  and  sixty  and 
ninety  day  paper.  It  is  obvious  that  a  "long"  bill  may 
be  sent  at  once  to  the  market  on  which  it  is  drawn  to  be 
sold  there  for  collection  at  maturity  or  may  be  held  in  the 
market  where  it  is  drawn,  as  in  the  case  above  cited. 

A  variety  of  factors  operate  upon  exchange  in  so  many 
conflicting  ways  that  only  those  who  make  a  careful  study 

1  Wall  Street  Journal,  November  18,  1903. 
233 


THE    PRINCIPLES    OF  MONEY   AND    BANKING 

of  the  subject  are  capable  of  making  all  the  intricate 
calculations  required  in  exchange  operations  and  judging 
with  reasonable  certainty  of  the  future  course  of  the 
market.  It  is  not  possible  here  to  follow  these  operations 
in  detail.  The  elements  which  bring  complication  into 
the  problem  are  the  arithmetical  differences  between  the 
units  of  foreign  money,  the  allowances  to  be  made  for 
interest  on  the  bills  themselves,  the  fluctuations  in  dis- 
count rates  at  different  points,  the  fluctuations  in  the 
value  of  currencies  which  are  not  upon  the  gold  standard, 
and  finally  the  movement  of  the  complex  forces  of  pay- 
ments of  all  kinds  to  be  made  on  one  side  or  the  other 
which  determine  the  equation  of  supply  and  demand. 
There  are  several  technical  terms,  however,  which  are  so 
frequently  met  with  in  discussions  of  foreign  exchange 
markets  that  their  definitions  may  properly  be  given  as 
they  were  presented  nearly  a  century  ago  in  Kelly's 
Cambist :" » 

"The  word  valuta  or  valeur  is  applied  on  the  Continent 
to  the  prices  or  rates  at  which  different  kinds  of  monies 
are  reckoned  in  commercial  transactions. 

"The  difference  of  one  sort  of  money  compared  with 
another  is  mostly  reckoned  at  so  much  per  cent.  When 
a  better  sort  is  given  for  a  worse,  the  premium  or  percent- 
age is  called  Agio;  but  when  the  difference  or  percentage  is 
considered  with  regard  to  the  inferior  sort  of  money,  it  is 
called  Discount.  Thus,  formerly,  when  100  florins  banco 
were  given  for  104  of  currency,  the  agio  on  banco  was  four 
per  cent. ,  but  when  the  same  sum  was  given  for  ninety- 
five  florins  currency,  then  banco  was  said  to  be  at  a  dis- 
count of  five  per  cent." 

It  is  by  the  skilful  combination  of  these  various  factors 
for  their  own  profit  that  the  operations  of  dealers  in  ex- 
change tend  automatically  to  withdraw  capital  from  the 
places  where  it  is  least  needed  and  concentrate  it  in  those 

1  The  Universal  Cambist  and  Commercial  Instructor,  I.,  p.  xxxiv. 

234 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

where  it  is  most  needed.  Their  guide  is  the  theoretically 
simple  one,  that  they  will  receive  the  highest  price  for 
money  where  it  is  in  the  greatest  demand.  The  margins 
upon  which  such  transactions  are  made  have  steadily 
grown  narrower,  and  the  employment  of  bills  of  exchange 
has  greatly  increased  with  the  expansion  of  commercial 
operations  in  recent  years.  A  solidarity  has  been  establish- 
ed between  different  markets  which  did  not  exist  a  century 
ago  or  even  a  generation  ago.  It  has  become  possible 
through  the  use  of  the  telegraph  and  ocean  cable  to  con- 
duct operations  in  exchange,  and  especially  in  indirect 
exchange,  upon  very  small  margins  of  profit.  Such  trans- 
actions are  often  made  by  bankers  without  direct  reference 
to  the  movement  of  commercial  bills,  simply  because  they 
find,  by  careful  comparison  of  the  rates  of  discount  in  dif- 
ferent markets  and  the  price  of  bills,  that  a  small  profit 
may  be  made  by  promptly  buying  or  selling.  Such 
transactions  are  called  arbitrage  of  exchange. 

Arbitrage  is  defined  by  Courcelle-Seneuil  as  a  traffic  in 
bills  "similar  to  that  in  merchandise,  which  consists  in 
buying  commercial  paper  which  is  depreciated  in  certain 
places  in  order  to  sell  it  in  other  places  where  it  is  in  de- 
mand." 1  As  the  operation  is  explained  by  Pierson:2 

"Just  as  the  merchant  makes  his  profit  out  of  differences 
in  the  prices  of  goods,  so  the  foreign  banker  makes  his  out 
of  differences  in  the  prices  of  bills,  and  the  operations  both 
of  the  merchant  and  the  banker  have  the  beneficial  effect 
of  reducing  these  differences  to  a  minimum." 

Under  normal  conditions  exchange  cannot  fall  below 
the  cost  of  importing  gold  nor  rise  above  the  cost  of  ex- 
porting it.  Special  circumstances  affecting  the  money 
market  or  the  state  of  credit  have  occasionally,  however, 
caused  rates  which  for  a  short  time  went  beyond  these 
limits.  When  there  is  a  stringent  money  market,  even  a 
favorable  rate  for  bills  of  exchange  may  not  tempt  the 

1  Traite  des  Operations  de  Banque,  p.  99. 
J  Principles  of  Economics,  I.,  p.  519. 

235 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

owners  of  money  to  invest  in  bills.  One  of  these  occasions 
was  at  the  outbreak  of  the  Civil  War  in  the  United  States 
in  1861,  when  the  political  conditions  produced  such  a 
desire  for  money  on  the  part  of  dealers  in  bills  that  they 
were  willing  to  sell  the  bills  at  a  sacrifice  rather  than  wait 
for  their  maturity  and  payment  in  England.  The  prob- 
ability of  war  had  led  to  the  reduction  of  importations  into 
the  United,  States,  and  this  had  brought  more  bills  into 
the  market  than  there  were  buyers  with  obligations  to 
settle  abroad.  The  combined  effect  of  the  large  net  offer- 
ings of  bills  and  the  desire  for  money,  was  to  depress  the 
price  of  bills  momentarily  below  the  cost  of  importing  gold.1 
The  operation  of  an  opposite  influence  was  felt  in  the 
United  States  in  October,  1839.  Specie  was  shipped  to 
England  at  a  loss  in  preference  to  bills  at  par,  owing  to  the 
apprehended  difficulty  of  getting  the  bills  discounted 
under  the  conditions  of  pressure  then  prevailing  in  the 
London  money  market.2 

The  development  of  the  ocean  cable  has  made  possible 
a  method  of  transferring  money  and  conducting  arbitrage 
operations  which  dispenses  with  the  direct  use  of  bills  of 
exchange.  This  method  is  thus  described  by  Bolles: s 

"Within  a  few  years  the  practice  has  arisen  of  trans- 
ferring money  by  telegraph,  or,  as  it  is  termed  by  the  news- 
papers, '  cable  transfer.'  By  this  method  a  merchant  who 
desires  to  ship  wheat  to  London  can  complete  the  transac- 
tion in  a  few  hours.  He  can  ship  the  wheat,  telegraph  the 
fact  to  the  consignee  at  London,  obtain  particulars  con- 
cerning the  conditions  of  the  market,  and,  if  he  think  best, 
have  the  wheat  sold  at  once,  'to  arrive,'  and  to  remit  the 
proceeds  through  a  London  banker.  A  bill  does  not  ap- 
pear at  all  in  the  transaction.  The  amount  of  business 
done  in  this  manner  has  materially  reduced  the  volume  of 
bills  in  some  places.  In  the  Eastern  trade  with  London, 
in  which  competition  is  exceedingly  keen  and  the  margin 

1  Bastable,  The  Theory  of  International  Trade,  p.  86. 
*  Raguet,  p.  27.  *  Practical  Banking,  p.  251. 

236 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

of  profit  consequently  small,  the  telegraphic  transfer-sys- 
tem has  been  in  use  for  several  years.  The  amount  of 
cable  transfers  between  this  country  and  European  coun- 
tries is  constantly  increasing." 

One  of  the  most  complicated  of  the  operations  of  ex- 
change is  indirect  exchange.  It  is  an  operation  which 
may  be  availed  of  as  a  convenience  in  settling  commercial 
transactions  and  as  a  source  of  profit  in  arbitrage  opera- 
tions in  bankers'  bills.  Indirect  exchange  is  the  employ- 
ment of  bills  drawn  on  a  given  point  to  settle  obligations 
at  another  point.  In  this  way  are  settled  many  of  the 
balances  between  countries  whose  direct  trade  with  one 
another  would  create  large  favorable  or  adverse  balances. 
If,  for  example,  the  United  States  has  sold  more  goods  to 
British  merchants  than  she  has  bought  from  them,  but 
British  merchants  have  sold  more  to  South  American 
merchants  than  they  have  bought  from  them,  it  is  a 
natural  thing  that  the  British  should  turn  over  to  the 
American  merchants  the  authority  to  collect  the  debts 
due  them  in  South  America  and  to  retain  the  proceeds. 
It  is  no  uncommon  thing,  when  the  current  of  trade  is  in 
the  other  direction,  so  that  money  is  due  by  British  im- 
porters to  the  wool  -  growers  of  the  Argentine  Republic, 
for  gold  to  be  shipped  from  New  York  to  Buenos  Ayres 
to  discharge  the  British  obligation. 

Such  operations  are  carried  on  through  brokers  and 
bankers,  who  are  governed  by  the  conditions  of  the 
market  in  determining  whether  to  ship  gold  or  to  buy 
or  sell  bills.  They  may  be,  and  often  are,  carried  on  by 
bankers  for  the  purpose  of  making  a  profit  by  arbitrage. 
In  such  cases  the  bankers  study  carefully  the  rates  of 
exchange  and  the  rates  of  interest  for  money  at  the  sev- 
eral points  which  they  propose  to  make  the  basis  of  their 
operations.  If  exchange  in  New  York,  for  example,  on 
Berlin  is  favorable  to  New  York,  so  that  a  comparatively 
small  amount  in  American  currency  will  buy  1000  marks 
in  Berlin,  while  exchange  in  Berlin  on  London  is  also 

237 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

favorable,  so  that  a  comparatively  small  amount  in  marks 
will  buy  a  draft  for  £100,  then  a  banker  in  New  York 
may  find  it  profitable  to  sell  drafts  on  London  directly  to 
his  clients,  but  to  cover  them  by  bills  on  Berlin,  which 
are  to  be  in  turn  invested  by  his  agents  there  in  bills 
on  London.  These  operations,  however,  involve  uncer- 
tainties and  require  skill  and  accurate  calculation  to 
afford  a  profit. 

It  might  be  supposed  that  in  balancing  international 
obligations  bills  for  an  equal  amount  would  be  drawn  on 
both  sides  of  the  account — that  is,  that  if  there  was  a 
real  equality  of  indebtedness,  bills  for  the  same  amount 
would  be  drawn  in  London  on  New  York,  and  in  New 
York  on  London.  This,  however,  is  not  a  fact.  London 
is  the  centre  on  which  most  bills  are  drawn.  The  exporter 
of  goods  to  England,  to  whom  money  is  due  in  London, 
draws  a  bill  on  London  entitling  him  to  its  payment.  The 
importer  of  goods  from  England,  on  the  other  hand, 
who  has  to  pay  for  goods  in  London,  usually  buys  a  bill 
on  London  for  making  his  payment  instead  of  waiting 
the  arrival  of  a  bill  drawn  against  him.  The  reason  for 
this  is  the  primacy  which  London  has  held  during  at 
least  a  century  in  financial  transactions.  This  primacy 
is  due  partly  to  the  fact  that  a  bill  on  London  is  payable 
in  pounds  sterling,  and  that  pounds  sterling  represent  a 
definite  weight  of  gold.  There  is  no  delay  nor  discount 
in  realizing  an  obligation  expressed  in  English  money. 
This  is  because  Great  Britain  adopted  the  gold  standard 
in  1816,  and  has  not  departed  from  it  even  to  the  extent 
of  charging  a  fractional  premium  for  gold  or  by  throwing 
obstacles  in  the  way  of  obtaining  gold  at  the  Bank  of 
England.  So  important  to  the  merchant  and  banker 
is  this  certainty  of  the  English  monetary  standard  that 
drafts  upon  foreign  countries  are  sometimes  expressed 
in  English  money.  This  is  done  in  order  to  escape  the 
risks  of  fluctuations  in  the  value  of  foreign  moneys,  es- 
pecially those  of  paper.  When  the  Crimean  War  broke 

238 


THE    PRINCIPLES    OP    FOREIGN    EXCHANGE 

out  in  1854,  the  London  Economist  advised  merchants 
having  transactions  with  Russian  subjects  to  conduct 
their  business  in  their  own  currency  instead  of  that  of 
Russia,  for  the  reason  that  "no  matter  then  how  low 
the  exchange  may  fall  in  Russia,  the  debtor  must  provide 
whatever  number  of  rubles  is  required  to  purchase  a  bill 
for  the  necessary  amount  expressed  in  the  stipulated 
currency."  1 

The  large  volume  of  business  done  by  London  bankers 
and  bill  brokers  has  given  a  reputation  to  bills  drawn 
upon  and  accepted  by  them  which  does  not  belong  to 
houses  perhaps  equally  strong  which  have  not  been  so 
long  established  at  the  centre  of  exchanges.  This  has 
resulted  in  making  bills  upon  London  a  favorite  form 
for  short  investments  on  the  European  Continent.  These 
bills  are  bought  by  bankers  and  held  for  a  shorter  or 
longer  time,  according  to  the  state  of  their  own  market 
and  that  of  London.  "London  paper"  often  changes 
hands  many  times  on  the  Continent  before  it  is  sent  to 
London  for  collection.  It  forms  one  of  the  best  forms 
of  assets  in  the  hands  of  continental  bankers  independent- 
ly of  the  profit  which  they  may  make  by  arbitrage  of 
exchange.  The  national  bank  of  Belgium  keeps  more 
than  half  its  reserves  in  foreign  bills,  largely  on  London, 
and  a  Paris  or  Berlin  banker,  by  following  the  same 
policy,  is  prepared  to  meet  any  sudden  deficiency  in  his 
cash  resources^  by  selling  a  parcel  of  his  foreign  bills.3 
So  firm  a  footing  has  this  system  obtained  in  the  inter- 
national money  market  that  the  chief  banks  of  conti- 
nental Europe  have  branches  in  London,  upon  which 
large  amounts  of  bills  are  drawn.3 

1  Clare,  p.  65.  J  Clare,  p.  90. 

'  This  condition  is  not  regarded  as  altogether  favorable  by 
W.  R.  Lawson,  who  says:  "Even  the  agency  business  is  being 
gradually  taken  away  from  the  London  banks,  and  their  share  of 
the  world's  money-market  is  becoming  rather  honorary." — 
British  Economics  in  1904,  p.  222. 

239 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

Very  different  is  the  status  of  bills  of  exchange  drawn 
on  countries  having  an  irredeemable  paper  currency. 
No  one  except  a  very  venturesome  speculator  cares  to 
hold  such  bills  as  an  investment,  because  there  is  no  de- 
finable limit  to  their  depreciation.  They  cannot  rise 
higher  in  value  than  gold,  except  a  fraction  under  the 
influence  of  a  special  demand  for  currency,  but  they  may 
fall  in  value  to  any  proportion  below  gold.  Bills  of  this 
character,  payable  in  irredeemable  paper,  are  subject  to 
the  law  of  supply  and  demand,  but  the  supply  is  the 
subject  of  monopoly  on  the  part  of  the  issuing  govern- 
ment, and  is  not  subject  to  the  regulating  influence  of  the 
free  movement  of  the  precious  metals  which  takes  place 
between  countries  having  a  fixed  metallic  standard. 
Hence  has  often  resulted  in  such  cases  violent  specula- 
tion in  bills  of  exchange  payable  in  irredeemable  currency. 
Thus,  when  Russia  was  upon  a  paper  basis,  as  Touze* 
points  out : l 

"  If  it  happened,  as  was  often  the  case,  that  the  Russians 
were  indebted  abroad  and  were  obliged  to  remit  English 
money  at  whatever  the  price  might  be  on  a  given  date, 
there  was  no  limit  to  the  price  that  might  be  demanded 
of  such  debtors ;  in  other  words,  there  was  no  limit  to  the 
variation  of  the  exchanges.  It  seemed  that  the  relative 
value  of  ruble-paper  and  cash  was  no  longer  one  of  the 
elements  of  the  problem.  Supply  and  demand  alone 
determined  the  price,  and  if  the  amount  of  the  exporta- 
tions  of  the  country  did  not  equal  the  amount  of  the  im- 
portations (as  was  generally  the  case),  and  if  the  demand 
for  bills  necessary  to  pay  for  the  importations  exceeded 
materially  the  amount  of  the  bills  provided  by  exporta- 
tion, the  balance  to  be  paid  could  be  settled  only  at  the 
cost  of  a  great  sacrifice." 

A  similar  situation  existed  for  several  years  in  Spain 
at  the  close  of  the  nineteenth  century  as  the  result  of  the 

Thtorique  ei  Pratique  du  Change,  p.  35. 
240 


THE    PRINCIPLES    OF   FOREIGN    EXCHANGE 

over-issues  of  the  Bank  of  Spain.  The  railways,  which 
had  heavy  remittances  to  make  at  certain  dates  to  Paris 
for  interest  on  their  bonds,  found  that  the  price  of  bills  of 
exchange  on  such  dates  was  forced  up  materially  in  Span- 
ish currency.  The  evil  was  partially  remedied  by  opening 
a  credit  at  two  leading  French  banks  of  50,000,000  francs 
in  favor  of  the  Bank  of  Spain.  The  purchase  price  of  bills 
of  exchange  was  fixed  from  time  to  time  by  a  syndicate 
committee  and  the  different  railways  agreed  not  to  bid 
against  one  another  for  bills  at  a  higher  price.1  This  opera- 
tion involved  in  effect  the  borrowing  of  the  amount  needed 
to  meet  deficiencies  in  the  amount  of  bills  of  exchange 
offered,  and  for  a  few  months,  by  careful  management  on 
the  part  of  the  Bank  of  Spain  in  gathering  up  local  bills  in 
different  cities,  exchange  was  kept  fairly  steady ;  but  the 
credit  in  Paris  was  exhausted  within  a  year  and  the 
experiment  was  not  sufficiently  successful  to  lead  to  a 
renewal  of  the  syndicate.2  Upon  a  nation  which  founds 
its  monetary  system  on  the  quicksands  of  irredeemable 
paper  heavy  burdens  are  imposed  in  carrying  on  business 
with  those  nations  whose  system  rests  upon  the  firm 
foundation  of  the  most  exchangeable  of  the  metals. 

In  a  market  where  the  precious  metals  move  freely,  it  is 
obvious  that  the  greater  the  number  of  cases  in  which 
bankers  are  able  to  intervene  in  the  market  by  the  sale 
and  purchase  of  bills,  the  smaller  will  be  the  number  of 
cases  in  which  gold  will  have  to  be  exported  or  imported. 
The  offerings  of  bills  arising  exclusively  from  commercial 
transactions  and  payable  on  sight  would  simply  economize 
cross-shipments  of  money,  but  would  require  that  actual 

1  Econo-miste  Europeen  (January  23,  1903),  XXIII.,  p.  107. 

9  Vide  Economiste  Europeen  January  24,  1904),  XXV.,  p.  156. 
Its  failure  was  predicted  by  Mitjavile  on  the  ground  that  the 
available  bills  would  be  largely  absorbed  by  those  having  obliga- 
tions to  meet,  who  could  not  afford  to  wait  for  the  syndicate  to 
appear  in  the  market  and  reduce  rates  and  would  therefore  pay 
any  rate  necessary  to  obtain  francs.— La  Crise  du  Change  en 
Espagne,  p.  151. 

l.-i6  241 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

net  differences  between  the  amounts  due  between  dif- 
ferent countries  should  be  settled  in  gold.  Such  dif- 
ferences could  not  be  considerable  without  reacting  sharp- 
ly upon  the  rates  for  the  rental  of  money,  and  this  reaction 
would  in  turn  influence  prices  and  the  cost  of  production 
of  goods  and  would  eventually  check  imports  of  goods  and 
stimulate  exports.  The  introduction  of  bankers'  bills  and 
securities  into  the  market  contributes  a  modifying  in- 
fluence which  prevents  a  sudden  and  unnecessary  opera- 
tion of  these  tendencies.  If  the  balance  of  payments  is 
only  temporary,  a  considerable  indebtedness  may  be 
allowed  to  stand  unsettled  by  either  commodities  or  gold 
until  the  balance  shifts  to  the  other  side.  This  is  coming 
more  and  more  to  be  the  case  where  there  is  a  large  ex- 
port of  national  products  at  one  season  and  large  imports 
of  foreign  goods  at  other  seasons. 

When  gold  moves,  however,  from  one  country  to  an- 
other, it  has  more  distinctly  the  character  of  merchandise 
than  in  trade  within  a  country,  partly  because  the  fact 
of  its  being  in  the  form  of  coin  plays  little  or  no  part  in  its 
value,  and  partly  because  the  shipment  takes  the  charac- 
ter of  a  definite  merchandise  movement  which  is  easier 
to  trace  than  in  the  interplay  of  demand  and  supply  for 
the  coined  medium  of  exchange  within  a  single  country. 
Gold  in  international  trade  is  one  of  many  articles  of 
merchandise  whose  movement  is  governed  by  the  law 
of  reciprocal  demand.  There  are  many  special  causes 
which  lead  to  a  demand  for  gold,  but  fundamentally  it 
acts  as  a  sort  of  arbiter  of  the  relations  of  other  com- 
modities to  one  another  in  the  international  market.  If 
the  cost  of  production  of  cotton  goods,  for  example,  in  the 
United  States  as  compared  with  the  cost  in  Great  Britain, 
is  increased  by  means  of  expanding  credit,  a  high  cost  of 
living,  and  a  consequent  successful  demand  by  laborers  for 
high  wages,  exports  of  cotton  goods  from  the  United 
States  to  China  may  decrease,  while  similar  exports  from 
Great  Britain  increase.  Diminished  exports  from  the 

242 


THE    PRINCIPLES    OF    FOREIGN    EXCHANGE 

United  States  will  result  in  diminished  offerings  in  New 
York  of  bills  upon  China,  or  more  probably  diminished 
offerings  of  bills  on  London  through  the  process  of  indirect 
exchange.  Foreign  exchange  in  New  York  will  tend  to 
rise  towards  the  gold  export  point.  If  gold  is  actually 
exported,  it  will  be  taken  from  bank  reserves  or  obtained 
from  the  Treasury  by  the  redemption  of  government  notes 
drawn  from  bank  reserves.  The  banks,  finding  their  re- 
serves diminished,  will  be  compelled  to  curtail  their  loans, 
in  order  to  restore  the  proper  legal  relation  between 
their  obligations  and  their  reserves,  and  this  curtailment 
of  loans  will  check  speculation  and  invite  higher  bids  than 
before  for  the  use  of  circulating  capital.  Hence  will  arise 
the  increase  in  the  rate  of  bank  discount  for  the  use  of 
money  which  has  proved  such  an  efficient  influence  in  main- 
taining a  healthy  equilibrium  between  the  value  of  gold 
and  of  goods  in  one  country  as  compared  with  its  value  in 
other  countries.  The  exchange  market,  with  its  offerings 
of  bankers'  bills  and  its  arbitrage  transactions  on  minute 
margins,  tends  constantly  to  overcome  movements  away 
from  this  equilibrium  and  to  give  a  uniform  value  to  gold 
in  all  markets. 

Rates  of  foreign  exchange  are  of  ten  said  to  be  "  favorable" 
when  they  tend  to  importations  of  gold  and  "  unfavorable  " 
when  they  tend  to  exportations  of  gold.  These  expressions 
have  been  criticised  by  some  economists  upon  the  ground 
that  trade  is  an  exchange  of  goods  and  that  too  much  gold 
is  no  more  to  be  desired  than  too  much  coal  or  iron.1  The 
expressions  "favorable"  and  "unfavorable"  might  be 
taken  as  a  mere  elision,  meaning  that  a  given  rate  of 
exchange  is  "favorable"  to  the  importation  of  gold  or 

'Thus  Bonamy  Price  says:  "This  language  is  profoundly  un- 
conscious that  gold  is  a  mere  tool.  It  teaches  that  gold,  or  coin, 
or  money  is  an  end,  a  good  thing  for  its  own  sake,  an  article  worth 
giving  one's  wealth  to  obtain.  It  is  saturated  with  the  Mercantile 
Theory,  so  utterly  in  vain  has  Adam  Smith  written." — Currency 
and  Banking,  p  33. 

243 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

another  rate  "unfavorable"  to  its  importation.  These 
terms,  however,  express  a  deeper  truth,  which,  if  some- 
times exaggerated,  nevertheless  represents  a  fundamental 
principle  of  monetary  science.  This  is  that  the  foreign 
exchanges,  by  indicating  the  movement  of  gold,  apply  the 
test  of  exchangeability  to  other  commodities.  There  are 
many  movements  of  gold  between  nations  which  are  not 
obviously  "favorable"  or  "unfavorable,"  but  when  a 
nation  begins  to  lose  gold  which  is  required  for  maintain- 
ing a  sufficient  circulating  medium  and  adequate  banking 
reserves,  this  outflow  is  properly  described  as  "unfavor- 
able." Such  an  outflow  results,  in  the  case  of  a  sound 
currency  system,  from  a  dislocation  of  the  industries  of  the 
country  and  of  the  cost  of  production  of  the  national  prod- 
ucts in  relation  to  those  of  other  countries.  Still  more 
"unfavorable"  is  such  an  outflow  if  it  arises  from  defects 
in  the  currency  system;  for  such  defects  do  not  usually 
carry  their  own  cure  by  the  "  correction  "  of  the  exchanges, 
but  prolong  the  condition  of  "unfavorable"  exchange 
until  a  country  has  parted  with  all  its  standard  money 
and  severed  its  monetary  system  from  the  regulating  in- 
fluence of  the  interplay  of  supply  and  demand  for  gold 
throughout  the  world. 


VI 

THE    DISTRIBUTION   OF   MONEY 

Governed  by  the  principle  of  marginal  utility— How  the  same 
principle  governs  distribution  of  capital — Demand  in  a  com- 
munity for  money  may  yield  to  demand  for  other  things — 
How  new  money  is  distributed — How  a  sound  monetary  system 
may  be  supported  by  borrowing — Quantity  of  money  needed  in 
a  country — Difference  between  discount  rates  and  interest  rates 
— Why  they  vary  in  different  markets. 

THE  essential  principle  which  governs  the  distribu- 
tion of  money  between  communities  is  the  so-called 
law  of  marginal  utility.  This  principle,  as  worked  out 
by  the  Austrian  school  of  economists,  is  simply  the  state- 
ment in  scientific  form  of  the  rule  that  every  man  will 
select  possible  objects  of  acquirement  in  the  order  in 
which  he  regards  them  as  most  necessary  for  his  use. 
A  mariner  about  to  desert  a  sinking  ship  would  consider  a 
boat  or  raft  of  the  highest  utility,  because  it  would  stand 
between  him  and  death.  He  would  next  choose  from  the 
equipment  of  the  vessel,  if  he  had  the  opportunity,  the 
most  nutritious  articles  of  food,  and  his  later  choice  would 
turn  to  clothing,  tools  for  construction  and  agriculture, 
or  weapons  for  defence,  according  to  the  nature  of  the 
country  upon  which  he  expected  to  be  cast  and  the  vary- 
ing degrees  of  usefulness  to  him  of  the  objects  open  to  his 
selection.  For  the  natural  man  food  is  among  the  first 
objects  of  utility;  shelter  perhaps  comes  second;  and 
clothing  next. 

Substantially  the  same  order  of  selection  prevails  with 
communities  far  advanced  in  civilization  and  with  their 

245 


THE    PRINCIPLES    OF  -MONEY    AND    BANKING 

individual  members.  The  laboring  -  man  who  receives 
ten  dollars  a  week  has  up  to  that  value  the  entire  world 
of  commodities  which  are  offered  for  sale  in  accessible 
markets  among  which  to  choose  his  objects  of  expendi- 
ture. He  might  devote  the  entire  sum  to  wines  or  dia- 
monds. He  is  driven,  however,  by  the  principle  of  mar- 
ginal utility  to  employ  his  slender  resources  in  buying  the 
articles  which  he  thinks  necessary  to  sustain  life.  A  loaf 
of  bread  each  day  becomes  to  him  of  the  highest  mar- 
ginal utility,  because  that  or  its  equivalent  in  nourishing 
qualities  is  absolutely  necessary  to  his  existence.  It  is 
only  the  first  loaf  of  bread  each  day,  however,  which  has 
this  high  utility.  Ten  loaves  become  less  valuable  in 
proportion  as  they  become  less  necessary  to  life  and  com- 
fort. When  a  sufficient  supply  of  bread,  therefore,  has 
been  purchased,  the  marginal  utility  of  the  next  most 
useful  article  becomes  greater  than  the  surplus  loaves 
of  bread,  and  the  surplus  of  earnings  above  the  amount 
required  for  the  bread  is  applied  to  the  next  article. 
Thus,  by  a  graduated  scale,  determined  in  every  case 
according  to  the  estimate  of  utility  of  the  article,  purchases 
from  income  are  extended  over  an  enlarged  series  of 
articles,  according  as  a  sufficient  supply  of  those  most 
essential  has  already  been  obtained. 

This  principle  of  marginal  utility  governs  the  invest- 
ment of  capital  and  the  movements  of  money.  It  is 
the  principle  which  gives  transferability  to  capital  and 
draws  it  in  the  directions  which  promise  the  greatest 
returns.  As  the  community  will  pay  the  highest  prices 
for  those  articles  upon  which  it  places  the  highest  es- 
timation under  the  law  of  marginal  utility,  it  follows 
that  capital  will  earn  the  highest  returns  if  devoted  to 
producing  these  articles.  The  distribution  of  capital 
between  communities  and  between  industries  will  be  de- 
termined in  the  long  run  by  the  utility  of  its  employ- 
ment to  the  owners  of  capital,  and  this  will  depend  upon 
its  degree  of  utility  to  the  community.  This  utility  will 

246 


THE    DISTRIBUTION    OF    MONEY 

be  indicated  by  the  rate  of  interest.  Capital  will,  there- 
fore, be  diverted,  as  rapidly  as  friction  can  be  overcome, 
from  employments  which  are  less  advantageous  to  the 
community  (according  to  the  current  estimates  of  util- 
ities) to  those  which  are  more  advantageous. 

Capital  will  have  a  higher  utility  in  a  new  community, 
whose  equipment  of  producing  plant  and  means  of  trans- 
portation is  incomplete,  than  in  one  where  this  equip- 
ment is  already  well  advanced.  Reason  for  this  is  found 
in  the  fact  that  the  supply  of  capital  has  become  com- 
paratively large  in  the  older  community  in  proportion  to 
the  demand  for  it,  and  it  is  the  marginal  price  of  the 
excess  which  determines  the  rate  for  all.  There  will 
be  no  such  excess  in  the  less  advanced  community,  and 
the  rate  will  be  determined  by  the  offer  which  the  users 
of  capital  are  willing  to  make  for  the  insufficient  supply 
in  the  market.  Thus  the  permanent  rate  of  interest  will 
be  governed  by  the  supply  of  loanable  capital.  A  small 
supply  will  be  employed  in  the  most  essential  works  and 
will  yield  the  highest  marginal  utility.  When  a  commu- 
nity has  been  provided  with  these,  the  excess  of  loanable 
capital  will  be  employed  upon  less  necessary  objects  and 
will  yield  less  utility  to  the  community.1  When  the 
supply  becomes  very  large,  the  position  of  the  borrower 
and  lender  are,  in  some  sense,  reversed,  and  the  lender 
will  make  concessions  in  order  to  obtain  some  return 
from  his  saved  capital.  How  these  contentions  between 
the  borrower  and  the  lender  are  reduced  to  a  nicety  upon 
a  uniform  and  graduated  scale  by  the  operations  of  the 
stock  market  will  be  set  forth  hereafter. 

The  distribution  of  money  is  governed,  like  that  of 

1  "In  a  developing  society,  a  colony,  or  a  new  country,  when 
everything  has  yet  to  be  created,  capital,  independently  of  de- 
mand and  supply,  is  infinitely  more  productive  than  in  an  old 
society,  where  the  larger  part  of  the  works  of  the  highest  degree  of 
usefulness  has  already  been  provided." — Leroy-Beaulieu,  De  la 
Repartition  des  Richesses,  p.  242. 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

other  forms  of  capital,  by  the  law  of  marginal  utility.  A 
community  which  has  much  capital  is  able  to  invest  a 
considerable  portion  in  the  tools  of  exchange;  a  com- 
munity without  saved  capital,  beyond  the  amount  neces- 
sary to  maintain  current  production,  is  able  to  invest  but 
little  in  the  tools  of  exchange.  How  this  principle  oper- 
ated in  the  early  history  of  America  is  well  set  forth  by 
Dewey :  * 

"As  no  silver  or  gold  mines  were  worked  in  the  settle- 
ments, the  only  source  of  supply  of  the  precious  metals 
was  through  trade  and  shipping;  that  is,  by  exporting 
commodities  to  a  greater  value  than  were  imported,  or 
by  acting  as  carriers  for  English  commerce.  The  colo- 
nists were,  however,  in  constant  want  of  manufactured 
commodities  and  articles  of  luxury  which  could  be  ob- 
tained only  on  the  continent,  and  consequently,  even  if 
the  balance  of  trade  in  staples  with  England  or  the  West 
Indies  was  favorable,  the  final  settlement  of  indebted- 
ness to  America  was  more  likely  to  be  made  in  merchan- 
dise than  in  silver.  The  consequence  was  that  the  quick 
amount  of  a  standard  money  medium  did  not  keep  pace 
with  expanding  industry  and  internal  commerce." 

This  is  the  scientific  explanation  of  the  state  of  the 
currency  in  nearly  every  new  country.  A  community 
which  began  without  saved  capital  and  was  able  to  pro- 
duce only  enough  goods  each  year  to  supply  its  pressing 
needs  for  food  and  clothing  could  not  afford  to  set  aside 
anything  as  a  medium  of  exchange.  A  unit  of  value 
might  be  conceivable  in  such  a  community,  but  all  ex- 
changes would  resolve  themselves  into  a  system  of  barter, 
more  or  less  refined.  When  such  a  community  saved 
sufficient  capital  to  set  aside  a  small  portion  for  invest- 
ment in  the  medium  of  exchange,  it  would  be  able  to 
employ  a  limited,  but  perhaps  insufficient,  amount  of 
the  precious  metals.  The  law  of  marginal  utility  in  such 

1  Financial  History  of  the  United  States,  p.  19. 
248 


THE    DISTRIBUTION    OF    MONEY 

a  case  would  lead  to  the  employment  of  the  cheaper 
rather  than  the  dearer  metal.  The  cheaper  metal,  as 
silver,  would  serve  the  purposes  of  such  a  community 
better  than  the  dearer  metal,  as  gold,  not  only  because 
of  the  greater  ease  of  obtaining  it  for  goods  and  retaining 
it  in  circulation,  but  because  its  greater  bulk  and  com- 
parative divisibility  would  adapt  it  better  to  small  trans- 
actions. Only  as  surplus  capital  became  adequate  for 
investment  in  the  tools  of  exchange  of  all  that  public 
convenience  required  would  a  stable  and  sufficient  gold 
currency  be  retained.1 

In  this  principle  is  found  the  key  to  many  puzzling 
phenomena  in  monetary  history.  The  advocates  of  an 
inferior  or  depreciated  currency  have  often  relied  upon 
arguments  lacking  in  straightforwardness,  because  they 
have  not  cared  to  make  the  confession  that  their  com- 
munity was  too  poor  to  set  aside  large  capital  for  invest- 
ment in  the  medium  of  exchange,  or  they  have  not  clearly 
grasped  the  law  governing  the  facts.  Even  where  the 
effort  has  been  made  in  such  communities  to  create  and 
maintain  a  currency  of  high  cost — that  is,  requiring  a 
large  investment  of  real  capital — the  principle  of  margin- 
al utility  has  often  made  the  experiment  a  failure.  The 
people  have  instinctively  sorted  out,  from  the  variety  of 
articles  offered  for  their  use,  those  having  the  highest 
marginal  utility.  It  is  quite  obvious  that  food,  clothing, 
and  other  necessaries  in  a  simple  community  would  out- 

1  Lexis  declared  that  the  weaker  states,  in  an  economic  sense, 
"especially  those  deeply  in  debt,  will  have  to  decide  to  forego  the 
gold  standard.  They  will,  perhaps,  make  a  few  more  attempts  to 
establish  a  gold  standard,  and  as  a  rule  they  will  actually  obtain 
the  gold  required  to  make  a  beginning,  but  they  will  not  be  able 
to  keep  it  in  free  commerce." — Report  of  the  Berlin  Silver 
Commission,  Senate  Misc.  Doc.  274,  s^d  Congress,  2d  Session, 
I.,  p.  134.  This  was  written  in  1894,  before  the  great  increase 
of  gold  production,  which  has  made  it  easier  for  weaker  coun- 
tries to  obtain  gold,  but  makes  a  correct  statement  of  the  prin- 
ciple involved. 

249 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

rank  the  use  of  gold  and  silver  in  the  order  of  human 
wants.  The  process  of  selection  becomes  more  com- 
plicated as  communities  advance  in  civilization  and  in 
the  accumulation  of  capital,  but  by  degrees  the  natural 
law  of  selection  of  the  commodity  having  the  highest 
marginal  utility  keeps  that  commodity  at  home,  and  sends 
abroad  in  exchange  the  commodity  having  a  less  degree 
of  marginal  utility.1 

The  tendency  to  devote  saved  capital  to  the  increase  of 
the  goods  necessary  for  comfort  and  for  effective  com- 
petition with  other  communities  is  so  persistent  that  in  a 
community  whose  saved  capital  is  close  to  the  margin 
necessary  for  the  purpose  there  is  a  constant  substitu- 
tion of  paper  credit  for  metallic  money  up  to  the  margin 
of  safety  and  even  beyond  this  margin.  This  tendency  is 
aided  by  the  demand  for  notes  as  a  tool  of  exchange, 
which  keeps  them  in  circulation  even  when  the  security 
for  them  is  not  of  the  best.  This  is  the  explanation  of 
the  abuse  of  banking  credit  in  comparatively  poor  com- 
munities. How  this  condition  was  brought  about  in 
the  early  history  of  the  United  States  is  thus  set  forth  by 
Simon  Newcomb : 2 

"  In  new  countries,  where  the  rate  of  interest  is  high 
and  the  demand  for  loans  great,  the  temptation  is  much 
stronger  than  elsewhere.  Thus  arose  the  'wild  -  cat 
banking '  which  was  so  prevalent  in  our  new  States  during 
their  early  history.  When  a  'wild-cat'  bank  was  estab- 
lished, its  practice  was  to  loan  its  own  notes  on  interest. 
The  banker  knew  that  there  was  little  immediate  danger 

1  "The  demand  of  one  class  of  the  population  for  cotton  to  spin, 
and  the  demand  of  others  for  wheat  or  for  beef,  are  not  and  can- 
not be  subordinated  to  the  desire  which  any  set  of  men  or  of  in- 
stitutions may  feel  to  see  gold  flow  in.  On  the  contrary,  the  re- 
quirements for  consumption,  determined  by  the  occupations  and 
relations  of  a  great  people,  are  fundamental  conditions,  to  which 
financial  interests  and  policies,  under  whatever  name,  must  of 
necessity  conform  their  action." — Dunbar,  Economic  Essays, 
p.  258.  2  Principles  of  Political  Economy,  p.  171. 

250 


THE    DISTRIBUTION    OF    MONEY 

of  those  notes  coming  back  in  great  numbers,  because  the 
community  was  too  much  in  want  of  them  as  money. 
He  was  therefore  tempted  to  loan  them  on  insufficient 
security,  especially  as  good  security  was  difficult  to  ob- 
tain under  the  circumstances.  If  he  could  induce  his 
customer  to  carry  the  notes  to  a  great  distance,  the 
danger  of  their  being  returned  for  payment  became  still 
less.  So  long  as  people  would  take  his  notes,  he  was  thus 
enabled  to  draw  a  high  rate  of  interest  on  a  very  small 
capital." 

One  of  the  reasons  why  money  tends  towards  the  com- 
mercial centres  at  the  expense  of  the  agricultural  sections, 
when  the  supply  in  a  country  is  not  sufficient  for  all  sec- 
tions, is  its  greater  usefulness  at  such  centres.  Even  if 
there  was  no  difference  in  the  capital  available  in  each 
case  for  investment  in  a  metallic  currency,  a  greater 
service  per  capita  would  be  rendered  by  a  given  volume 
of  money  in  the  cities  than  in  the  agricultural  districts. 
The  business  of  the  cities  is  essentially  the  exchange  of 
commodities,  while  that  of  the  agricultural  sections  is 
the  production  of  them.  While  production  usually 
involves  more  or  less  of  exchange,  the  ratio  of  exchanges 
to  the  population  is  smaller.  This  not  only  makes  a 
large  volume  of  money  less  essential  to  the  producing 
sections,  but  makes  the  active  work  imposed  upon  a  given 
piece  of  money  much  smaller.  This  is  inevitably  the 
case  from  the  more  scattered  character  of  the  popula- 
tion in  the  country  districts,  as  well  as  from  the  smaller 
ratio  of  the  occasions  for  making  exchanges  than  in  a 
population  where  exchange  by  trading  is  the  chief  busi- 
ness of  a  large  part  of  the  community. 

If  the  cost  of  the  use  of  money  could  be  divided  among 
the  population  by  the  service  which  it  rendered  during  a 
given  period,  it  would  be  found  that  a  single  piece  per- 
formed many  times  the  service  in  exchanges  in  the  cities 
which  it  performed  in  the  producing  districts.  If,  for 
illustration,  the  convenience  of  employing  money  to  make 

251 


THE    PRINCIPLES    OF    MONEY   AND    BANKING 

exchanges  was  worth  one-tenth  of  one  per  cent,  for  each 
exchange,  it  might  be  found  that  a  given  piece  of  money 
would  perform  five  exchanges  in  a  day  in  a  trading  centre, 
making  the  cost  per  day  for  employing  the  money  in  each 
transaction  only  one-fifth  of  the  total  cost  of  its  use.  In 
the  producing  sections,  on  the  other  hand,  only  one 
exchange  a  day  might  be  performed,  imposing  the  whole 
cost  of  the  use  of  the  money  upon  the  individual  who 
employed  it  for  this  exchange.  Thus  the  marginal  cost 
of  the  use  of  money  in  proportion  to  the  transactions  per- 
formed is  greater  in  the  agricultural  or  producing  dis- 
tricts than  in  the  trading  centres.  This  difference  in 
cost,  although  difficult  to  trace  in  detail,  would  probably 
be  felt  in  slight  differences  in  prices  of  commodities,  dis- 
count rates,  and  banking  commissions,  which  would  lead 
the  country  districts  to  employ  the  minimum  of  actual 
money  which  could  be  employed,  or  even  less  than  what 
might  be  profitably  employed.1  The  man  who  employed 
money  in  the  trading  centre,  whether  by  direct  borrowing 
from  banks  or  by  granting  trade  discounts  for  cash,  would 
obtain  the  use  of  such  an  amount  of  money  as  convenience 
required  at  a  small  fraction  of  what  its  cost  would  be  in 
the  producing  districts,  and  would  therefore  employ  it 
more  freely. 

This  conflict  between  the  demand  for  money  as  a  neces- 
sary implement  of  trade  and  the  demand  for  other  things 
explains  the  absorption  of  the  large  production  of  gold 
during  the  last  few  years  in  countries  which  formerly 
lacked  a  sufficient  gold  currency.  Incidentally,  also,  it 
shows  what  powerful  laws  of  distribution  come  in  con- 

1  An  inquiry  made  in  1881  showed  that  the  proportion  of  coin 
paid  into  certain  banks  of  the  Metropolitan  District  of  Manchester 
was  25.21  per  cent,  of  the  total  payments,  while  in  certain  towns 
reporting  it  was  17.31  per  cent.,  and  in  sixty-one  agricultural 
places  only  10.68  per  cent.  The  proportion  of  coin  used  in  the 
Manchester  suburbs,  where  there  was  a  large  demand  for  wage 
payments,  was  34.9  per  cent. — G.  H.  Pownall,  Journal  of  the 
Institute  of  Bankers  (December,  1881),  II.,  p.  636, 

252 


THE    DISTRIBUTION    OF    MONEY 

flict  with  the  direct  operation  of  the  quantity  theory  of 
money.  The  gold  money  of  the  world  increased  from 
$1,209,800,000  in  1873  to  $5,685,700,000  on  January  i, 
1904.  If  the  new  gold  had  simply  found  its  way  into 
countries  already  employing  a  gold  currency,  and  into 
those  parts  of  such  countries  where  gold  was  already  most 
plentiful  —  simply  placing  three  and  a"  half  additional 
ounces  of  gold  beside  every  ounce  already  in  use — the 
effect  would  undoubtedly  have  been  seriously  felt  upon 
prices  and  upon  national  stocks  of  the  metal.  The  new 
money,  however,  was  far  from  being  distributed  in  equal 
parts  among  the  countries  already  equipped  with  a  gold 
currency,  or  in  those  parts  of  such  countries  which  were 
best  equipped.  These  countries  materially  increased 
their  holdings  of  gold,  but  a  large  part  of  the  new  supply 
sought  new  outlets,  where  a  gold  currency  had  not  before 
been  used.  The  following  table  shows  the  remarkable 
increase  in  gold  equipment  in  several  leading  countries, 
and  indicates  also  the  appearance  among  gold-standard 
countries  of  nations  which,  down  to  a  recent  date,  pos- 
sessed little  gold  currency: 

STOCK    OF    GOLD    MONEY   IN    LEADING    COUNTRIES 

COUNTRY  Stock  in  1873                Stock  January  i,  1904 

United  States $135,000,000  $1,320,400,000 

Great  Britain 160,000,000  530,400,000 

France 450,000,000  968,300,000 

Germany 160,200,000  801,400,000 

Belgium 25,000,000  30,000,000 

Austria-Hungary 35,000,000  286,800,000 

Netherlands 12,000,000  28,400,000 

Russia 149,100,000  783,700,000 

Australasia ...  50,000,000  128,600,000 

Examination  of  this  table  shows  that  the  greatest 
percentage  of  increase  in  the  gold  stock  was  not  in  the 
countries  which  were  already  rich  in  1873,  but  in  those 
which  were  then  struggling  towards  greater  wealth  and  a 
greater  degree  of  economic  independence.  The  reason 
why  so  much  of  the  new  gold  went  to  countries  formerly 

253 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

without  a  gold  currency  is  found  largely  in  its  relatively 
small  utility  in  the  countries  already  equipped  with  such 
a  currency.  There  is  little  doubt  that  these  richer  coun- 
tries would  have  been  able  to  retain  the  new  gold  if  they 
had  preferred  it  to  other  forms  of  capital,  but  they  did 
not  need  it.  Austria-Hungary,  Russia,  Japan,  and  sev- 
eral South  American  countries,  which  needed  it  more, 
adopted  the  gold  standard  and  took  the  proper  measures 
by  the  issue  of  loans  to  obtain  the  gold  without  foregoing 
necessary  purchases  of  other  things  abroad.1 

New  supplies  of  the  metals  or  new  issues  of  bank-notes 
find  their  way  into  communities  which  have  carried  on 
business  mainly  by  barter,  and  where  an  increased  amount 
of  metallic  or  representative  money  adds  materially  to  the 
convenience  of  transactions.2  A  demand  for  additional 
supplies  of  money  was  found  even  in  France  after  the 
Calif ornian  gold  discoveries,  when  the  new  gold  worked 
its  way  into  the  rural  districts  and  supplied  a  medium  of 
exchange  where  it  had  before  been  lacking.  The  same 
was  true  in  many  of  the  states  of  Germany  and  in  the 
United  States.  These  countries  have  gained  materially 
by  the  opportunity  of  obtaining  an  adequate  supply  of  the 
medium  of  exchange,  but  these  supplies  have  not  in- 

1  Japan  derived  her  surplus  gold,  without  impairing  her  pro- 
ductive   resources,    from    the    indemnity    of    200,000,000     taels 
($100,000,000)  levied  upon  China  by  the  treaty  of  Shimonoseki. 
The  manner  in  which  £30,476,642  in  English  gold  was  transferred 
to  Japan  is  fully  set  forth  in  the  Report  on  the  Adoption  of  the 
Gold  Standard  in  Japan,  by  Count  Matsukata,  pp.  223-225.     The 
process  was  somewhat  similar  to  that  by  which   Germany  was 
enabled   to   draw   gold   from   leading  money    markets,   without 
sacrifice  of  her  own  capital,  from  the  proceeds  of  the  war  indemnity 
levied  upon  France  in  1871. 

2  "How  many  new  markets,"  exclaims  Cauwes,  "have  been 
opened  to  money  since  the  sixteenth  century  1     Eastern  Europe 
was  still  half-barbarous  and  America  had  just  been  born  to  civiliza- 
tion.    There  has  been  a  sort  of  race  between  the  accumulation 
of  money  by  exploitation  of  the  mines  and  the  development  of  the 
commerce  of  the  world." — Cours  d' Economic  Politique,  II., p.  159. 

254 


THE    DISTRIBUTION    OF    MONEY 

creased  prices  in  the  proportion  which  they  bore  to  the 
pre-existing  stocks  of  the  precious  metals.  In  France  they 
caused  some  increase  of  prices  in  the  rural  districts  by 
means  of  the  increased  activity  which  was  given  to  trade, 
but  not  in  proportion  to  the  increase  in  the  supply  of  the 
metals,  which  in  some  communities  was  many  hundred 
per  cent.  How  useful  in  meeting  the  needs  of  growing 
trade  were  these  unexpected  supplies  of  gold  in  France 
was  thus  set  forth  by  Horn  as  long  ago  as  1866:  * 

"  Twenty-five  or  thirty  years  ago  three-quarters  perhaps 
of  the  rural  population  of  France  still  lived  almost  ex- 
clusively under  the  regime  of  barter.  ...  At  most  the  small 
cultivator  sold  from  time  to  time  a  few  hectoliters  of 
grain  or  some  head  of  cattle,  a  few  fowls  and  vegetables, 
to  pay  the  farm  rent,  pay  taxes  and  make  some  absolutely 
necessary  purchases  of  furniture,  clothes,  tools,  and  im- 
plements. Such  a  condition  of  things  assuredly  required 
but  a  small  employment  of  the  instruments  of  exchange 
and  circulation.  All  this  is  changed  to-day  for  two 
quarters  at  least  of  the  three  of  which  I  have  spoken. 
Railways  in  a  special  degree,  the  development  of  educa- 
tion in  general  and  of  economic  education  in  particular,  the 
great  abundance  of  precious  metals,  the  propagation  of 
banknotes,  have  brought  the  country  districts  to  the  centres 
of  population,  the  most  isolated  and  backward  into  the 
general  movement  of  affairs.  The  regime  of  exchange 
extends  its  domain  before  our  eyes.  Purchases  and  sales 
are  multiplied  in  the  villages  and  are  introducing  them- 
selves into  the  hamlets.  In  those  arrondissements  and 
cantons  where  formerly  the  bill  was  a  myth  and  the  gold 
louis  a  phenomenon,  hundreds  of  thousands  of  francs  and 
even  millions  in  specie  and  in  bills  are  now  in  continuous 
rotation,  promoting  a  movement  of  transactions  which 
grow  in  intensity  and  extent  day  by  day." 

The  fact  that  the  quantity  of  gold  in  a  country  is  de- 

1  La  Liberte  des  Banques,  p.  263. 
255 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

termined  by  its  marginal  utility  in  reference  to  other 
articles  explains  why  the  per  capita  circulation  differs 
radically  in  different  countries,  without  necessarily  involv- 
ing a  corresponding  difference  in  the  range  of  prices.  If 
the  quantity  theory  of  money  in  its  crudest  form  were  true, 
then  a  per  capita  circulation  of  less  than  fourteen  dollars 
in  Great  Britain  and  of  twenty -four  dollars  in  France 
should  cause  the  price  of  wheat  in  Great  Britain  to  be 
fourteen  pence  per  bushel  when  it  was  twenty-four  pence 
in  France.  This  would  be  obviously  impossible  under  the 
modern  system  of  transportation,  which  tends  to  bring 
prices  to  a  level  in  international  markets.  Why  then  does 
not  the  money  of  France  pour  in  a  golden  torrent  into 
Great  Britain,  in  order  to  keep  the  ratio  of  money  to 
prices  there  the  same  as  the  ratio  in  France  ?  It  does  not 
appear  that  the  volume  of  business  in  France  is  more 
than  one  and  a  half  times  that  in  Great  Britain.  On  the 
contrary,  it  is  probable  that  the  volume  of  business  in 
Great  Britain  is  larger  in  proportion  to  population  than  in 
France. 

The  explanation  of  this  seeming  contradiction  is  inade- 
quate and  unsatisfactory  under  the  usual  form  of  stating 
the  quantity  theory  of  money.  It  is  true  that  it  may  be 
ascribed  to  differences  in  the  mechanism  of  credit,  but 
such  an  explanation  hardly  goes  to  the  root  of  the  problem. 
If  the  French  people  were  not  sufficiently  rich  in  capital  to 
be  able  to  afford  a  large  volume  of  money  as  a  tool  for 
carrying  on  their  exchanges,  a  deficiency  in  the  mechanism 
of  credit  in  France  would  tend  as  much  to  reduce  the  de- 
mand for  money  by  hampering  transactions  as  to  in- 
crease the  demand  for  it.  But  in  France  there  is  a  large 
volume  of  transactions  to  be  carried  on,  because  there 
is  a  great  output  of  the  products  of  French  industry.  The 
French  people,  because  of  their  limited  use  of  credit,  which 
has  given  a  high  marginal  utility  to  gold,  have  been  willing 
to  exchange  their  products  in  international  trade  for  gold, 
while  Great  Britain,  with  a  more  perfectly  organized  sys- 

256 


THE    DISTRIBUTION    OF    MONEY 

tern  of  credit,  has  been  able  to  exchange  her  products  chief- 
ly for  things  other  than  gold.  But  Great  Britain  is  in  a 
position  to  obtain  gold  when  she  needs  it,  as  quickly  as  any 
country,  and  more  quickly  than  most,  by  reducing  the 
prices  of  a  few  of  her  great  output  of  exportable  articles 
whose  marginal  utility  at  home  is  reduced  by  excess  of 
supply. 

The  principle  of  marginal  utility,  which  explains  the 
ability  of  France  to  acquire  a  stock  of  gold  two-thirds 
larger  per  capita  than  that  of  Great  Britain,  explains  the 
contrary  phenomenon  of  a  scanty  supply  of  money  in 
countries  whose  resources  are  small.  If  the  quantity 
theory  were  applied  in  its  crudest  form  to  a  country  with 
a  small  stock  of  gold,  like  the  United  States  in  1897,  with 
a  per  capita  stock  of  only  about  seven  dollars,  prices  in 
the  United  States  should  be  very  much  lower  than  in 
Great  Britain,  with  her  per  capita  stock  of  about  fourteen 
dollars  in  gold.  In  so  far  as  the  United  States  were 
equipped  with  credit  instruments  redeemable  in  gold  on 
demand,  the  inequality  in  the  stock  of  gold  would  be 
partly  counterbalanced ;  but  in  a  country  where  the  en- 
tire stock  of  redeemable  money  was  inadequate  for  a 
normal  volume  of  transactions,  it  would  follow  from  the 
quantity  theory  that  prices  should  be  extremely  low  and 
that  a  large  influx  of  gold  should  occur. 

Undoubtedly,  in  such  cases,  there  is  some  tendency  to 
export  certain  goods  at  prices  which  are  not  only  low  in 
terms  of  gold,  but  which  involve  a  large  proportional 
sacrifice  in  labor.  The  essential  point  to  be  noted,  how- 
ever, in  reference  to  the  relation  of  such  exports  to  gold, 
is  that  they  are  not  made  to  obtain  gold  so  much  as  to 
obtain  other  necessary  commodities.  In  other  words,  the 
marginal  utility  of  the  importation  of  certain  commodities 
is  greater  than  would  be  the  utility  of  importations  of 
gold.  Such  countries,  so  far  as  their  policy  is  determined 
by  individual  producers  and  consumers,  tend  to  prefer 
certain  necessaries  or  comforts  of  life  to  the  investment 
i.-i7  257 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

of  capital  in  an  adequate  medium  of  exchange.  In  such 
countries  there  is  a  constant  tendency  to  economize  the 
use  of  money  to  the  danger  point,  because  the  capital 
required  for  the  maintenance  of  a  metallic  currency  can- 
not be  devoted  to  this  purpose  without  sacrifice.  Hence 
in  the  United  States,  prior  to  the  Civil  War,  and  in  many 
other  poor  countries,  it  has  been  continuously  the  case, 
for  many  years  at  a  time,  that  their  stock  of  gold  per 
capita  was  smaller  than  that  of  other  countries  without 
causing  a  corresponding  fall  in  general  prices.1 

So  strong  has  been  the  momentum  acquired  in  recent 
years  by  the  sentiment  in  favor  of  gold  that  some  of  the 
poorer  nations,  less  qualified  by  their  economic  strength 
than  the  rich  countries  to  maintain  a  gold  currency,  have 
been  carried  perhaps  too  far  along  the  same  path.  It 
may  be  doubted  whether  a  nation  of  weak  economic  re- 
sources can  successfully  compete  without  serious  sacrifices 
for  that  part  of  the  gold  stock  of  the  world  required  to 
provide  an  adequate  gold  currency.  Where  the  gold  can 
be  defended  in  a  measure  by  the  policy  of  the  govern- 
ment or  the  banks  in  charging  a  premium  for  it  the  prob- 
lem becomes  easier.  There  is  a  considerable  difference 
between  a  currency  based  on  a  gold  standard  and  a  gold 
circulation.  The  one  can  be  obtained  and  defended  by 
proper  legislation ;  the  other  more  or  less  defies  legislation 
and  tends  to  drain  a  country  of  slender  economic  resources 
of  its  monetary  stock. 

An  illustration  of  this  principle  is  afforded  by  the  ex- 
perience of  Chile,  one  of  the  most  progressive  of  the  South 
American  republics.  The  wealthy  portion  of  the  Chilean 
population  is  only  a  small  percentage  of  the  whole,  and 
experience  has  seemed  to  show  that  the  country  is  not 
sufficiently  strong  economically  to  retain  a  gold  currency 
in  use.  The  experiment  of  a  gold  currency  was  inaugu- 

1  This  principle  was  partially  recognized  at  the  time.  It  is 
declared  by  Raguet,  "A  rich  nation,  cateris  paribus,  will  require 
more  gold  and  silver  than  a  poor  one." — Currency  and  Banking,  p.  5. 

258 


THE    DISTRIBUTION    OF    MONEY 

rated  under  favorable  conditions  in  1895.  For  a  time  gold 
circulated  freely  and  the  country  seemed  to  be  restored 
to  a  sound  monetary  basis.  But  the  shadow  of  political 
disturbances  and  the  demands  of  the  foreign  exchanges 
caused  a  drain  upon  the  gold  supply  in  1898  which  was 
not  arrested  until  the  country  was  almost  denuded  of  its 
monetary  resources.  Then  came  the  inevitable  suspen- 
sion of  gold  payments  and  the  recurrence  of  the  conditions 
so  frequent  in  the  history  of  weak  countries — the  issue  of 
an  irredeemable  paper  currency. 

A  run  began  upon  the  banks  in  June,  1898,  an  extension 
of  debts  was  granted  by  the  government,  and  an  act  was 
passed  on  July  3oth,  providing  for  the  issue  of  50,000,000 
pesos  ($18,000,000)  in  paper.  An  effort  was  made  to 
provide  a  redemption  fund  and  for  resumption  of  gold 
payments  on  January  i,  1902,*  but  on  the  arrival  of  that 
date  a  new  law  prorogued  resumption  to  January  i,  I905.2 
The  report  made  by  the  United  States  minister  on  the 
occasion  of  the  first  suspension  throws  an  interesting  light 
on  the  difficulties  which  were  encountered  from  the  be- 
ginning in  maintaining  a  gold  circulation  in  Chile.  When 
the  resumption  act  went  into  effect  the  banks  had  not 
made  proper  provision  for  redeeming  their  notes  in  gold. 
When  the  government  sought  to  compel  compliance  with 
the  law,  it  was  met  with  statements  that  such  a  course 
would  ruin  the  banks  and  throw  into  confusion  the  com- 
merce of  the  country.  One  delay  after  another  was 
granted,  therefore,  and  bank-notes,  instead  of  being  in- 
cinerated when  redeemed  in  gold,  were  again  put  in 
circulation.  The  absence  of  sufficient  gold  to  put  the 
country  on  a  real  specie  basis  is  thus  set  forth:3 

1  Report  of  the  Director  of  the  Mint  for  1898,  p.  402. 

*  Report  of  the  Director  of  the  Mint  for  1902,  p.  273.  A  further 
postponement  to  1910  was  authorized  in  1904,  with  an  issue  of 
30,000,000  pesos  of  new  paper. — U.  S.  Consular  Reports  (April, 
1904),  LXVIII.,p.  14. 

1  Report  of  the  Director  of  the  Mint  for  1898,  p.  398. 

259 


THE    PRINCIPLES    OP    MONEY  AND    BANKING 

"Operations  were  all  on  a  fictitious  basis,  everything 
being  done  by  check,  the  principal  business  of  the  coun- 
try being  transacted  through  the  Bank  of  Chile,  which 
was  not  in  a  sound  cash  position.  It  was  not  an  infre- 
quent thing  between  banks  to  discharge  balances,  payable 
in  gold  to  the  extent  of  millions,  with  a  small  percentage 
in  gold  and  the  remainder  in  checks  and  bank-notes." 

These  are  substantially  the  same  symptons  of  financial 
weakness  which  prevailed  in  the  United  States  in  their 
early  history.  The  scanty  supply  of  saved  capital  sought 
investment  in  other  things  than  a  costly  medium  of  ex- 
change and  compelled  the  banks  to  keep  up  a  pretence  of 
specie  payments  which  was  little  more  than  a  fiction. 

An  important  means  of  supplying  a  poor  country  with  a 
sound  and  sufficient  supply  of  money  is  afforded  by  the 
resources  of  modern  finance.  It  is  possible  for  a  country 
having  need  for  money,  but  having  only  a  small  fund  of 
capital  for  investment,  to  obtain  it  by  borrowing.  This  is 
rendered  easy  by  the  modern  system  of  transferable 
securities.  The  sale  of  such  securities  to  capitalists  of 
lending  countries  having  a  surplus  fund  of  loanable  capital 
has  the  practical  effect  of  giving  to  the  borrowing  country 
a  great  quantity  of  the  implements  of  production  and  ex- 
change— finished  machinery,  railway  equipment,  the  raw 
materials  of  manufacture,  and  even  luxuries  —  without 
compelling  immediate  payment.  Early  payment  may  be 
made  to  the  dealers  in  these  articles  in  the  lending  country, 
but  is  made  substantially  from  the  funds  contributed  by 
the  lenders  in  that  country  when  they  purchase  securities 
issued  in  the  borrowing  country.  The  financiers  of  the 
latter  country,  in  paying  for  these  means  of  development 
by  the  delivery  of  pieces  of  paper  in  the  form  of  negotiable 
securities,  increase  the  capital  available  at  home,  without 
sending  out  anything  of  direct  value  in  payment.  Gold 
may  be  obtained  in  this  manner  as  well  as  other  commodi- 
ties. The  power  to  acquire  gold,  moreover,  is  increased 
by  the  supply  of  capital  which  has  been  intrusted  to  the 

260 


THE    DISTRIBUTION    OF    MONEY 

borrowing  country.  The  metal  is  perhaps  more  liable 
to  flit  across  national  boundaries  or  across  the  ocean  than 
other  articles,  but  a  well-organized  credit  system  and 
business  customs  and  laws  which  protect  the  sanctity 
of  contracts  make  it  far  from  impossible  to  retain  a  gold 
currency  in  the  face  of  comparative  poverty  of  native 
resources. 

One  of  the  best  illustrations  of  the  maintenance  of  a 
gold  currency  by  borrowing  is  that  of  the  Russian  Empire. 
Russia  struggled  for  more  than  one  hundred  years,  from 
1768  to  1895,  with  irredeemable  paper  currency,  con- 
stantly fluctuating  in  value.  Attempts  were  made  on 
four  different  occasions — in  1817,  1839,  1860,  and  1881 — 
to  retire  the  paper  and  return  to  a  specie  basis.  All  these 
attempts  failed  for  various  reasons  until  1895,  when  the 
government  was  enabled  to  accumulate  a  gold  reserve  of 
nearly  $500,000,000,  including  foreign  credits.  A  series 
of  well-considered  measures  for  the  acceptance  of  special 
gold  deposits  at  the  Imperial  Bank,  the  issue  of  gold 
certificates,  and  finally  the  free  payment  of  gold  for  public 
obligations  at  a  fixed  rate  of  exchange  with  the  paper 
currency,  put  Russia  finally  and  securely  upon  the  gold 
standard.  The  outstanding  paper  currency,  which  stood 
at  986,600,000  rubles  ($510,000,000)  on  October  i,  1897, 
when  the  gold  circulation  was  only  107,000,000  rubles, 
fell  to  555,000,000  rubles  on  October  i,  1899,  while  gold 
was  in  circulation  to  the  amount  of  662,300,000  rubles. 
Even  with  this  large  circulation  of  gold,  the  reserve  of  the 
Imperial  Bank  retained  856,000,000  rubles  ($445,000,000) 
in  gold,  exceeding  by  more  than  300,000,000  rubles  the 
amount  of  bank-notes  remaining  in  circulation. 

The  capital  which  enabled  the  Russian  government  to 
accomplish  such  important  results  within  so  short  a  space 
of  time  was  obtained  by  the  issue  upon  the  Paris  and  Berlin 
markets  of  Russian  national  securities,  which  was  supple- 
mented as  soon  as  the  gold  standard  was  fairly  established 
by  large  issues  and  sales  of  the  securities  of  Russian  mining 

261 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

and  industrial  companies.  The  public  debt  was  increased 
from  11,619,434,008  francs  on  January  i,  1887,  to  16,- 
567,830,000  francs  ($3,150,000,000)  on  January  i,  1900, 
but  without  any  material  increase  in  interest  charges, 
because  of  the  heightened  credit  derived  from  the  main- 
tenance of  the  gold  standard.1  This  large  fund  of  foreign 
capital  was  brought  into  Russia  without  direct  compensa- 
tion in  the  export  of  Russian  products,  and  contributed 
to  the  remarkable  industrial  development  of  the  country 
in  recent  years.  It  is  obvious  that  the  policy  of  prompt 
fulfilment  of  obligations  and  the  adoption  of  a  fixed  mone- 
tary standard  produced  results  far  superior  to  any  which 
were  realized  during  the  many  years  when  the  government 
sought  the  elusive  profit  derived  from  forced  issues  of  irre- 
deemable paper.2 

The  experience  of  Russia  demonstrates  that  it  is  far 
better  economy  for  a  poor  country  to  maintain  its  credit 
unimpaired,  and  thereby  to  attract  the  aid  of  foreign 
capital  for  developing  its  resources,  than  to  rely  upon  the 
questionable  expedients  of  an  unsound  financial  policy. 
An  equipment  of  the  medium  of  exchange  based  upon  the 
standard  of  other  civilized  nations  may  thus  be  obtained 
without  crippling  the  native  resources  of  the  country 
which  are  necessary  for  production.  The  organization  of 
credit  should  permit  the  greatest  possible  economy  in  the 
use  of  the  precious  metals  up  to  the  point  where  the  main- 
tenance of  a  metallic  currency  and  of  confidence  in  its 
soundness  are  unimpaired,  but  economy  becomes  short- 
sighted and  harmful  when  it  goes  beyond  this  point.  A 
country  relying  largely  for  its  development  upon  borrowed 

1  Fonds  d'Elat  Russes  et  Autres  Valeurs  Mobilises  criie  en 
Russie,  pp.  39,  64. 

1  It  is  declared  by  Anspach  that  before  the  monetary  reform 
"  Foreign  capital,  of  which  Russia  stood  greatly  in  need  to  exploit 
her  natural  resources,  was  difficult  to  attract,  because  capitalists 
always  feared  that  the  profits  realized  would  be  swallowed  up  by 
the  decline  in  the  quotations  of  the  credit-ruble." — La  Russie 
Economique,  p.  82. 

262 


THE    DISTRIBUTION    OF    MONEY 

capital  runs  grave  risk  of  the  withdrawal  of  such  capital  if 
its  good  faith  is  called  in  question,  as  was  the  case  with  the 
United  States  after  the  passage  of  the  silver  law  of  1890. 
The  panic  of  1893  was  largely  due  to  the  withdrawal  of 
foreign  capital  after  the  Baring  crisis  at  London  in  1890. 
This  withdrawal  was  caused  partly  by  the  need  for  money 
in  London,  but  largely  also  by  the  fear  of  foreign  investors 
that  the  United  States  were  slipping,  consciously  or  other- 
wise, from  the  gold  on  to  the  silver  standard.1 

It  does  not  follow  from  the  high  cost  of  a  gold  currency, 
and  the  greater  relative  ability  of  a  rich  country  to  retain 
it,  that  such  a  country  should  employ  an  excessive  volume 
of  metallic  currency,  or  should  not  avail  itself  of  reasonable 
economies  in  its  use.  The  question  of  the  relative  effi- 
ciency and  utility  of  the  instruments  employed  comes 
into  play  in  the  wealthy  community  as  well  as  in  the  poor- 
er. If  book  accounts  and  methods  of  credit  will  permit 
the  carrying  on  of  exchanges  in  as  perfect  a  manner  as 
the  employment  of  the  precious  metals,  then  the  highest 
economy,  even  in  a  wealthy  community,  will  justify 
their  employment.  The  necessity  of  reducing  compe- 
tition with  other  producing  countries  to  the  closest  lim- 
its, under  the  law  of  marginal  utility,  may  suggest  the 
investment  of  capital  in  other  parts  of  the  machinery  of 
production  rather  than  in  the  tools  of  exchange.  Under 

1  The  effect  of  a  sound  monetary  system  is  felt  not  only  upon 
investments  of  capital  of  a  permanent  character,  but  also  upon 
the  movement  of  the  loan  fund.  Thus  the  Wall  Street  Journal 
of  May  24,  1904,  in  its  usual  daily  review  of  the  money  market, 
said:  "Ever  since  the  enactment  of  the  gold  standard  law  of 
March  14,  1900,  there  has  been  competition  in  the  New  York 
money  market  between  foreign  and  domestic  capital.  Before  that 
law  was  passed,  foreign  bankers  required  gold  notes  for  loans  and 
were  indisposed  to  put  their  money  out  freely.  Since  there  has 
been  no  possibility  of  question  in  regard  to  the  kind  of  money  in 
which  loans  were  to  be  paid,  foreign  capital  has  been  eager  to 
place  loans  here  whenever  rates  were  a  shade  better  than  at 
home." 

263 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

such  conditions  the  true  marginal  utility  of  the  precious 
metals  will  be  found  at  the  point  where  the  amount  em- 
ployed is  sufficient,  with  instruments  of  credit,  to  carry  on 
business  with  the  greatest  ease,  insure  confidence  in  the 
monetary  system,  and  maintain  a  sufficient  reserve  of  the 
precious  metals  to  prevent  specie  suspension  in  periods  of 
depression  or  emergency. 

Great  Britain,  the  wealthiest  country  in  the  world, 
has  a  per  capita  circulation  equal  to  about  two -thirds 
that  of  the  United  States  and  less  than  half  that  of 
France.  Some  of  the  poorest  countries  exhibit  the 
largest  volume  of  currency  per  capita.  What  is  the 
explanation  of  these  apparent  departures  from  the  rule 
of  investment  in  money  in  proportion  to  the  effective 
demand  for  it?  Some  of  the  poorest  countries  showing 
large  supplies  of  money  are  producers  of  the  precious 
metals  and  are  not  able  to  dispose  of  their  metallic  prod- 
ucts for  other  goods  promptly  enough  to  prevent  a  large 
accumulation.  They  may  be  considered,  in  a  sense,  as 
surplus  stocks  of  their  product  rather  than  as  money. 
The  differences  between  the  leading  commercial  countries, 
however,  are  due  to  other  causes.  The  chief  cause  is  the 
organization  of  the  system  of  credit.  It  may  be  assumed 
that  the  five  leading  commercial  countries — the  United 
States,  Great  Britain,  France,  Germany,  and  Belgium — 
are  upon  a  nearly  equal  footing,  so  far  as  their  ability  is 
concerned  to  obtain  an  adequate  supply  of  metallic  cur- 
rency. If  the  proportions  differ  widely  it  is  because  one 
has  availed  herself  more  or  less  largely  than  another  of 
substitutes  for  money. 

If  the  credit  system  is  well  developed,  the  quantity  of 
money  used  will  be  proportionately  less.1  If  a  given 

1  "But  if  it  be  true  that  a  developing  nation  increases  for  a 
period  the  quantity  of  its  money,  it  is  none  the  less  true  that  a 
time  arrives  when  the  necessity  for  increasing  the  monetary  stock 
is  no  longer  felt. — when,  on  the  contrary,  the  industrial  mechanism, 
in  becoming  more  perfect,  permits  the  same  quantity  of  transac- 

264 


THE    DISTRIBUTION    OF   MONEY 

country  with  a  highly  developed  credit  system  emj 
more  metallic  money  than  some  other  country  witho\ 
credit  system,  the  explanation  of  the  seeming  paradox  is 
found  in  the  larger  demand  in  the  former  case  for  both 
money  and  its  substitutes  expressed  through  a  larger 
volume  of  transactions.  Thus  several  rules  operate  upon 
one  another  —  the  ability  to  invest  capital  in  metallic 
money,  the  rapidity  of  the  use  of  such  money  in  town 
and  country,  the  degree  to  which  the  use  of  credit  has 
obviated  the  necessity  for  money,  and  the  volume  of 
transactions  expressed  in  money — to  create  wide  differ- 
ences and  seeming  confusion  in  the  relative  equipment  of 
each  community  with  money ;  but  underlying  them  all  is 
a  real  harmony  of  distribution  which  responds  to  the 
rule  which  Kinley  lays  down : x 

"Although  resort  to  direct  barter  is  not  available, 
society  can  vary  its  exchanges  through  credit,  and  will 
do  so  until  the  marginal  utility  of  money  for  effecting 
exchanges  directly  is  equal  to  its  marginal  utility  for 
effecting  them  through  the  credit  machinery." 

What  has  thus  far  been  said  in  regard  to  the  distribu- 
tion of  money  and  its  substitutes  may  be  said  to  relate 
to  its  permanent  distribution  among  trading  countries. 
It  remains  to  consider  the  more  transient  movements 
which  carry  money  back  and  forth  between  countries 
reasonably  well-equipped  with  currency,  and  the  reasons 
and  methods  of  such  movements.  A  civilized  country 
which  has  become  accustomed  to  the  general  use  of 
money  is  not  likely  to  part  with  the  amount  required  for 
ordinary  transactions,  even  under  severe  pressure.  The 
benefits  of  using  money  as  a  medium  of  exchange  are  so 
great  and  obvious  after  its  use  is  once  introduced,  espe- 
cially in  towns  and  cities,  that  a  real  penury  of  money 
for  retail  transactions  is  seldom  permitted,  even  for  the 
purpose  of  obtaining  other  important  benefits.  Such 

tions  to  be  effected  with  a  less  quantity  of  money." — Beaure, 
p.  83.  '  Money,  p.  134. 

265 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

changes  as  occur,  therefore;  in  the  supply  of  currency  in  a 
civilized  country  are  those  which  affect  the  speculative 
funds  and  loan  funds,  and  their  influence  is  first  felt  upon 
bank  reserves  and  the  stock  exchanges.  These  changes 
only  rarely  go  far  enough  to  reach  down  into  the  pockets 
of  the  masses  and  draw  out  of  a  country  the  necessary 
equipment  of  the  means  of  exchange.  If  a  serious  defi- 
ciency of  money  develops  for  any  reason  within  a  country 
as  compared  with  its  neighbors,  the  influence  is  finally 
felt  upon  prices  of  certain  classes  of  exportable  goods. 
Prices  will  fall  and  will  attract  money  for  the  purchase  of 
good  from  countries  where  money  is  more  plentiful  and 
prices  of  goods  are  higher.  The  results  are  thus  set  forth 
by  Pantaleoni : l 

"  There  will  therefore  be  an  influx  of  money  into  the 
market  where  prices  are  low  from  the  one  where  they  are 
high,  which  will  continue  until  the  increased  amount  of 
money  in  the  first,  by  causing  a  rise  of  prices,  and  the 
diminished  amount  of  money  in  the  second,  by  causing  a 
fall  of  prices,  have  brought  about  a  uniform  level  of  prices 
in  both  markets.  This  phenomenon  is  expressed  in  an- 
other Ricardian  theorem — viz.,  that  the  amount  of  the  cur- 
rency is  regulated  in  each  country  by  its  value." 

This  explanation  of  the  causes  underlying  the  move- 
ment of  money  is  subject  to  some  qualification,  and 
relates,  in  a  large  degree,  to  the  permanent  distribution 
of  money.  It  requires  to  be  supplemented  by  a  state- 
ment of  other  influences  which  affect  its  temporary  dis- 
tribution. The  temporary  transfer  of  instruments  of 
credit  is  usually  due  to  changes  in  the  rate  of  discount. 
The  modern  mechanism  of  credit,  of  which  the  discount 
rate  is  a  part,  affords  several  steps  for  restoring  equilib- 
rium between  the  demand  and  supply  of  money  before 
prices  of  commodities  are  seriously  affected.  A  surplus  of 
currency  affects  the  discount  rate,  which  is  the  charge  for 

1  Pure  Economics,  p.  234. 
266 


THE    DISTRIBUTION    OF    MONEY 

the  rental  of  money,  and  the  rate  of  discount  determines 
the  movements  of  money.1  How  wide  these  differences 
have  been  between  rates  of  interest  and  discount  is  illus- 
trated by  the  following  table,  which  shows  for  a  period 
of  seven  years  the  average  discount  rate  of  the  Bank  of 
England  and  the  average  interest  rate  afforded  by  English 
consols: 2 

YEAR  1879     1880     l88l     1882     1883     1884    1 88S 

Discount  rate...  2.63  2.75  3.50  4.12  3.54  2.53  2.91 
Interest  rate....  3.07  3.03  3.01  2.96  2.97  3.02  3.02 

The  reason  for  these  differences  between  the  discount 
rate  and  the  rate  of  interest  is  found  in  the  different  sub- 
jects with  which  they  deal.  This  is  defined  by  Nitti  as 
follows : 

"The  duration  of  operations  of  commercial  discount 
makes  bank  loans,  contrary  to  current  opinion,  loans  of 
money  and  not  of  capital.  This  explains  why  monetary 
phenomena  have  a  marked  influence  upon  discount,  while 
they  have  but  a  mild  action  upon  interest.  The  rate  of 
interest  varies  only  over  long  periods,  while  the  rate  of 
discount  varies  rapidly.  The  reason  for  this  difference 
between  two  phenomena  which  are  so  similar  in  appear- 
ance is  in  the  difference  in  their  essence.  The  first  is  a 
loan  of  capital ;  the  second  is  a  loan  of  money.  Discount 
is  then  only  a  phenomenon  of  the  monetary  circulation 
and  must  suffer  the  reaction  of  numerous  and  frequent 
variations  in  the  value  of  money." 

It  should  be  added,  in  qualification  of  this  view,  that 
money  and  banking  credits  are  the  concrete  expression 
to  a  large  degree  of  the  fund  of  floating  capital  seeking 

1  "  It  is  clear  that,  notwithstanding  a  necessary  parallelism  be- 
tween the  variations  of  discount  and  of  interest  under  a  system 
of  pure  economics,  capital  and  money  are  essentially  different,  and 
the  market  for  loans  of  capital  is  not  the  market  for  loans  of 
money." — Pantaleoni,  p.  263. 

1  Nitti.in  Revue  d'Economie  Politique  (May,  1898),  XII.,  p.  371. 

267 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

investment  for  short  terms.  The  scarcity  of  such  capital 
is  more  closely  linked  with  the  scarcity  of  money  than  is 
the  scarcity  of  capital  invested  in  permanent  forms,  or 
seeking  such  investments.  The  loan  fund  of  floating 
capital  is  not  exactly  identical  with  the  money  supply, 
but  the  two  are  more  nearly  coextensive  with  each  other 
than  either  is  with  the  entire  fund  of  capital.  They 
therefore  respond  more  nearly  in  the  same  degree  to  com- 
mon influences.  Money  is  subject  to  the  laws  which 
govern  other  merchandise.  There  is  often  a  special  de- 
mand for  money  as  such  independently  of  the  demand 
for  capital.  Under  normal  conditions  of  the  market  the 
value  of  money,  as  influenced  by  banking  operations,  is 
determined  by  changes  in  the  discount  rate  rather  than 
by  changes  in  the  prices  of  commodities.  A  rise  in  the 
discount  rate,  which  adds  to  the  value  of  money  for  the 
time  being,  may  have  a  reaction  upon  prices,  but  the  fact 
which  is  indicated  primarily  by  the  rise  in  the  rate  is 
that  the  circulating  medium  is  not  adequate  to  the  de- 
mand for  its  use.  An  adequate  supply  of  the  circulating 
medium  may  be  attracted  through  the  discount  rate 
without  any  marked  influence  upon  prices  of  commod- 
ities. 

If  the  discount  rate  is  so  efficient  and  sensitive  a  factor 
in  the  distribution  of  money,  it  may  be  asked  why  dis- 
count rates  do  not  exhibit  greater  uniformity  in  different 
countries.  The  average  rate  of  discount  in  1895  at  Lon- 
don, for  illustration,  was  two  per  cent.,  while  the  rate  at 
Brussels  was  2.60  per  cent.,  at  Berlin  3.15  per  cent.,  and  at 
Rome  and  St.  Petersburg  five  per  cent.1  Why  did  not  a 
rate  of  five  per  cent,  at  Rome  and  St.  Petersburg  draw 
gold  in  an  overflowing  stream  from  London  and  Brussels 
and  compel  the  banks  there  to  raise  their  rates?  The 
answer  is  found  in  the  various  component  elements  of 
which  the  rate  of  discount  is  made  up.  It  includes  not 

1  Bulletin  de  Statistique  (January,  1897),  XLI.,  p.  90. 
268 


THE    DISTRIBUTION    OP    MONEY 

only  the  rental  charge  for  money,  but  the  rental  charge 
for  the  use  of  capital.  These  charges  are  affected  by 
some  elements  in  common,  but  each  is  subject  to  special 
influences  which  do  not  act  upon  the  other.  The  rate 
for  the  rental  of  capital  differs  permanently  between 
countries.  This  difference  is  due  in  some  degree  to  the 
friction  which  interferes  with  the  free  play  of  economic 
laws,  but  is  due  also  to  a  number  of  special  causes.  Neither 
capital  nor  money  possesses  perfect  transferability,  but 
money  comes  much  nearer  to  doing  so  than  other  tangible 
forms  of  capital.  It  is  a  reasonable  proposition,  there- 
fore, that,  in  order  to  draw  money  from  one  country  to 
another  by  changes  in  the  discount  rate,  the  advance  in 
the  rate  must  be  more  than  the  differences  in  the  rates  for 
rental  of  capital  in  the  two  countries.  If  the  discount 
rates  set  forth  above  for  1895  represented  the  normal  rate 
for  the  rental  of  both  capital  and  money,  in  the  countries 
named — which  was  pretty  nearly  the  fact  at  that  time — 
it  is  obvious  that  a  demand  for  money  in  London  which 
resulted  in  an  advance  of  the  discount  rate  to  three  per 
cent,  might  attract  money  from  Brussels,  but  would  not 
attract  it  from  Berlin  or  Rome.  It  would  be  necessary, 
in  order  to  attract  money  from  Berlin,  to  put  the  rate 
in  London  at,  say,  3.50  per  cent.,  and,  in  order  to  attract 
it  from  Rome,  to  put  it  at  5.50  per  cent.  If  it  was  de- 
sired in  those  markets  to  protect  their  money  supply,  a 
slight  advance  above  these  rates  would  be  made  there. 
There  is  sufficient  sympathy  between  the  European 
markets  to  cause  an  advance  in  the  discount  rate  in  one 
to  be  followed  usually  by  advances  in  the  others,  but  the 
advance  is  added  to  the  normal  rate  for  the  rental  of 
capital,  which  differs  from  country  to  country.1 

1  With  the  extension  of  international  banking,  there  is  a  growing 
tendency  towards  bringing  rates  for  both  capital  and  money  nearer 
together  in  different  markets  by  placing  the  surplus  capital  of  one 
at  the  disposition  of  another,  where  rates  are  high.  Much  Ger- 
man capital  has  been  thus  embarked  in  recent  years  in  Italian 

269 


THE  PRINCIPLES  OP  MONEY  AND  BANKING 

The  element  of  risk  is  an  important  factor  in  determin- 
ing the  rate  for  loans,  although  it  is  not  always  distinctly 
separated,  even  in  the  minds  of  borrowers  and  lenders, 
from  the  charge  for  the  rental  of  capital  under  conditions 
of  security.  There  is  a  complexity  of  elements  which 
increase  or  diminish  risk,  which  includes  not  merely  the 
relative  certainty  of  profit  in  investments  and  the  stand- 
ard of  commercial  integrity,  but  also  special  commercial 
habits  and  laws  governing  the  collection  of  debts.  One  of 
these  elements  is  the  nature  of  the  monetary  standard 
and  the  laws  which  govern  it.  A  short-term  loan  in 
London  has  for  many  years  represented  the  minimum 
of  risk  because  of  the  certainty  that  it  would  be  paid  in  a 
single  metal,  the  steadiness  of  monetary  conditions  there, 
the  rules  of  prompt  payment  which  govern  English  com- 
mercial transactions,  and  the  laws  which  enforce  these 
rules.  The  risk  of  loss  is  in  general  less  in  an  old  country, 
where  conditions  are  comparatively  fixed  and  the  chances 
of  profit  can  be  reasonably  calculated,  than  in  a  new 
country,  where  enterprises  are  constantly  undertaken 
which  have  not  the  experience  of  similar  enterprises  in 
the  past  as  a  guide  for  determining  profits.  In  new 
countries,  therefore,  a  higher  discount  rate  is  charged  for 
reasons  which  are  distinctly  economic.  The  standard 
of  commercial  integrity  is  usually  more  definite,  and  its 
rules  are  better  known,  in  a  country  long  accustomed  to 
trade  than  in  one  where  trade  is  just  developing.  In 
the  old  country  greater  "conservatism"  prevails;  in  the 
new  country,  greater  daring  and  bolder  taking  of  risks, 
which  add  to  the  danger  of  losing  borrowed  capital. 

The  influence  of  legislation  upon  the  movements  of 
capital  is  great,  in  spite  of  the  fact  that  legislation  often 
involves  an  interference  with  the  free  play  of  economic 
principles.  When  several  states  of  the  United  States 

banking  companies  in  Genoa  and  Rome,  with  a  view  to  earning 
for  the  German  stockholders  the  high  rates  for  money  and  capital 
which  prevail  in  Italy. 

270 


THE    DISTRIBUTION    OF    MONEY 

passed  laws  during  periods  of  crop  failure  and  depression, 
tending  to  make  it  difficult  to  collect  debts  and  foreclose 
mortgages,  insurance  companies,  bankers,  and  other 
classes  of  lenders  naturally  refused  to  extend  loans  where 
such  laws  prevailed,  and  withdrew  the  capital  already 
invested  as  rapidly  as  possible,  with  the  result  of  greatly 
raising  the  rate  charged  for  money  by  the  borrowers  who 
continued  willing  to  take  the  risks.  Dangerous  and 
fraudulent  investments,  in  addition  to  the  direct  risk  in- 
volved, tend  indirectly  to  raise  the  rate  for  the  rental 
of  capital  by  withdrawing  considerable  amounts  from 
legitimate  use  and  diminishing  the  available  supply.1 
These  elements  confuse  the  real  difference  between  the 
economic  value  of  capital  in  an  old  country  and  an  un- 
developed one  and  make  the  actual  discount  rates  farther 
apart  than  the  purely  economic  difference  would  make 
them. 

Another  reason  for  wide  differences  in  the  charge  for 
loans  is  found  in  the  relations  of  supply  and  demand  in 
different  markets,  as  affected  by  the  degree  of  friction 
involved  in  transferring  capital.  A  comparatively  small 
equipment  of  gold  would  oversupply  the  needs  of  the 
St.  Petersburg  market,  if  introduced  suddenly  from 
London  or  Paris,  but  would  not  at  once  force  down  the 
discount  rate  in  a  degree  corresponding  to  the  increased 
supply,  because  a  high  rate  has  been  established  by  cus- 
tom and  the  circle  of  solvent  borrowers  could  not  be  in- 
definitely extended.  The  effect  of  security  and  large 
supplies  of  gold  in  reducing  the  average  discount  rate 
proceeds  gradually  in  countries  whose  economic  condition 
is  improving,  until  low  rates  become  customary  and  the 
market  becomes  more  sensitive  to  changes  in  the  rate. 

1  "  The  point  of  equilibrium  of  the  supply  and  demand  of  capital 
is  forced  upward  by  the  action  of  the  speculators  who  are  not 
really  in  a  position  to  offer  interest,  but  who  are  enabled  by  the 
blindness  of  certain  sections  of  the  investing  public  to  compete 
in  the  market  for  industrial  loans." — Hatlley,  p.  283. 

271 


THE  PRINCIPLES  OF  MONEY  AND   BANKING 

Friction  and  the  cost  of  transferring  money  explain  the 
differences  which  have  prevailed  on  many  occasions 
between  Paris  and  London,  when  the  loan  of  capital  was 
almost  equally  safe  in  either  place.  Movements  of  capi- 
tal and  money  have  taken  place  from  Paris  to  London, 
when  the  rate  has  been  materially  higher  at  the  latter 
point,  but  have  not  been  followed  by  a  rise  in  the  discount 
rate  at  Paris,  because  of  the  small  effect  produced  upon 
the  economic  system  of  France.  The  London  market 
is  the  most  sensitive  of  the  markets  of  the  world,  partly 
because  it  is  the  centre  of  international  transactions  and 
partly  because  the  English  people,  under  the  present  or- 
ganization of  their  banking  system,  have  preferred  to  sub- 
mit to  frequent  changes  in  the  discount  rate  rather  than 
to  invest  a  larger  part  of  their  surplus  capital  in  an  idle 
reserve  of  gold. 


BOOK   III 
THE    EVOLUTION    OF    MONETARY    SYSTEMS 


BOOK    III 


TYPES    OF    CURRENCY    SYSTEMS 

Seven  principal  forms  of  metallic  and  paper  money — Significance 
of  the  single  metallic  standard — The  scientific  meaning  of  bi- 
metallism— The  "ratio"  between  gold  and  silver — Develop- 
ment of  the  gold  exchange  standard — Redeemable  government 
paper — Defects  of  such  paper  when  irredeemable — Character 
of  modern  bank-note  issues — How  these  systems  are  combined 
in  various  ways  in  modern  civilized  states. 

A^  almost  infinite  variety  of  systems  of  currency  has 
gradually  grown  up  under  the  influence  of  local  con- 
ditions in  different  nations.  There  are,  however,  certain 
general  principles  underlying  these  systems  which  divide 
them  into  a  few  clearly  marked  types.  These  types  may 
be  thus  described: 

1.  The  single  metallic  standard. 

2.  The  bimetallic  standard. 

3.  The  gold  exchange  standard. 

4.  Redeemable  government  paper. 

5.  Irredeemable  government  paper. 

6.  Redeemable  bank-note  paper. 

7.  Irredeemable  bank-note  paper. 

I.  The  monetary  standard  is  the  unit  of  account  by 
which  values  are  measured.  The  possession  by  coins  of  one 
metal  of  the  function  of  the  sole  metallic  standard  of 
value  implies  that  those  coins  are  the  recognized  means  of 
measuring  values  and  discharging  debts.  This  quality  of 

275 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

measuring  values  may  be  conferred  by  custom,  as  in 
California  during  the  Civil  War,  when,  by  general  agree- 
ment of  the  mercantile  community,  gold  coin  was  treated 
as  the  standard,  in  disregard  of  federal  laws  making  ir- 
redeemable paper  a  legal  means  of  discharging  debt;  but 
it  is  a  quality  which  is  usually  derived  from  law  and  then 
conforms  to  the  definition  of  Leroy-Beaulieu:1 

"The  government  chooses  a  single  metal  as  the  sole  and 
permanent  basis  of  its  monetary  system  and  confers  upon 
this  metal  the  power  to  discharge  debts  in  payments  of 
any  amount,  admitting  other  metals  only  as  partial  money 
capable  of  employment  in  payments  only  to  a  certain 
amount,  or  as  optional  money,  which  may  be  received  as  a 
convenience  without  being  obligatory." 

The  latter  system — of  optional  forms  of  payment,  with- 
out fixed  legal  relation  between  different  moneys — is  not 
usual  in  modern  civilized  states,  because  of  its  incon- 
venience. It  prevailed  more  or  less  in  the  trading  cities 
of  the  Middle  Ages,  where  the  national  coinage  was  limited 
and  many  varieties  of  foreign  coins  were  in  use;  but  the 
absence  of  a  definite  legal  standard  caused  much  incon- 
venience and  afforded  greater  benefits  to  the  money- 
changer than  to  the  merchant.  Under  such  conditions 
there  is  a  tendency  on  the  part  of  the  mercantile  com- 
munity, for  the  purpose  of  self -protection,  to  select  some 
one  coin  as  the  standard  and  quote  others  in  terms  of  the 
standard . 

The  important  point  in  regard  to  the  standard  metal  is 
not  that  it  is  used  necessarily  in  large  amounts  in  actual 
circulation,  but  that  it  measures  the  value  of  the  other 
forms  of  the  circulation.  A  currency  consisting  only  of 
the  standard  metal  must  inevitably  be  made  up  of  coins 

1  Traitt  d' Economic  Politique,  III.,  p.  171.  Leroy-Beaulieu  in- 
sists that  this  system  is  not  properly  defined  as  monometallism, 
because  it  usually  permits  the  employment  of  several  metals  in 
subordinate  capacities  and  even  assures  much  better  than  other 
systems  the  simultaneous  use  of  these  metals. 

276 


TYPES    OF    CURRENCY    SYSTEMS 

of  the  metal ;  but  if  these  coins  are  combined  in  use  with 
other  forms  of  money,  the  standard  coins  may  be  much 
less  in  evidence  than  auxiliary  forms.  Thus,  Great  Brit- 
ain is  properly  said  to  be  on  the  gold  standard,  because 
values  in  Great  Britain  are  measured  in  gold,  but  the 
currency  in  actual  use  consists  largely  of  silver  and  paper. 
The  United  States  are  usually  said  to  be  on  the  gold  stand- 
ard, but  gold  rarely  appears  in  circulation.  The  state  of 
the  silver  circulation  in  the  United  States  is  such  as  to  bring 
their  system  more  properly  under  the  definition  of  the 
gold  exchange  or  limping  standard,  but  there  is  no  doubt 
that  gold  is  the  standard  by  law  and  the  measure  of  value 
in  fact.  In  Java,  which  is  also  on  the  limping  standard, 
very  little  gold  currency  exists,  but  values  are  measured 
substantially  in  gold.  Thus  the  standard,  in  a  country  of 
composite  forms  of  money,  is  not  necessarily  the  only 
form  of  currency  in  use,  but  is  the  form  to  which  others 
are  definitely  related. 

II.  Bimetallism,  in  its  proper  scientific  sense,  is  that 
currency  system  which  contemplates  the  free  coinage  and 
concurrent  circulation  of  two  metals,  either  or  both  of 
which  may  be  employed  without  limit  in  paying  debts — 
which,  in  other  words,  possess  full  legal -tender  power. 
The  word  itself  does  not  exclude  other  possible  definitions, 
but,  as  Walker  declares,  may  mean  "something  concern- 
ing two  metals,  in  conjunction  or  in  some  mutual  relation 
to  each  other."  Walker  further  defines  the  practical 
application  of  the  definition  to  gold  and  silver  in  the  fol- 
lowing terms : l 

"  In  ordinary  speech,  if  without  qualification  or  previous 
explanation,  it  means  either  the  system  of  national  bimet- 
allism, with  free  coinage  of  both  metals  at  the  legal  ratio, 
such  as  existed  in  the  United  States  from  1792  to  1873,  in 
France  after  1785,  and  in  many  other  countries  at  various 
times;  or  else,  and  this  more  properly,  the  system  of  in- 

1  International  Bimetallism,  p.  i. 
277 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

ternational  bimetallism — again  with  free  coinage  of  the 
metals,  at  a  ratio  common  to  the  contracting  nations — 
such  as  existed  under  the  Latin  Union  between  1865  and 
1873 ;  such  as  has  been  proposed  to  be  constituted  between 
wider  groups  of  nations,  in  successive  international  con- 
ferences and  in  a  host  of  treaties,  tracts  and  public  ad- 
dresses." 

We  shall  see  hereafter  that  Walker  himself  denies,  in 
the  case  of  the  United  States,  that  bimetallism  was  given  a 
fair  trial,  and  we  shall  have  occasion  to  point  out  that  it 
was  not  until  very  recently  that  the  term  bimetallism  was 
understood  in  its  modern  sense.1  But  the  definition  of 
Walker  is  of  value  as  showing  the  position  regarding  bi- 
metallism taken  by  one  of  the  ablest  and  most  tem- 
perate of  its  advocates.  The  definition  of  bimetallism 
given  by  Darwin  is  that  "Bimetallism  means  any  cur- 
rency system  which  would  establish  a  right  on  the  part 
of  the  debtor  to  discharge  his  liabilities  at  his  option  in 
either  of  the  two  metals  at  a  ratio  fixed  by  law." :  This 
definition  is  open  to  criticism  in  omitting  the  element  of 
free  coinage  of  both  metals,  without  which  bimetallism  in 
its  proper  sense  cannot  be  said  to  exist. 

The  "ratio"  to  which  these  definitions  refer  is  the  rela- 
tion of  weight  at  which  each  metal  is  coined  into  pieces 
of  equal  value.  Thus,  the  ratio  of  15^  to  i,  which  pre- 
vailed for  more  than  a  century  in  France,  means  that 
fifteen  and  a  half  ounces  of  silver  will  coin  into  the  same 
amount  of  money  as  one  ounce  of  gold.  The  ratio  of  "six- 
teen to  one,"  so  much  discussed  in  the  United  States, 
means  that  the  weight  of  pure  silver  in  a  standard  silver 
dollar  is  the  same  as  the  weight  of  pure  gold  which  would 

1  Cernuschi,  while  contending  that  the  bimetallic  system  dates 
back  to  antiquity,  declares  that  "  It  was  on  January  9,  1869,  at 
the  Economists'  dinner  in  Paris,  that,  disliking  to  use  the  decep- 
tive expression  double  etalon  (double  standard),  I  improvised  a 
new  one,  monnaie  bimetallique ." — Tlie  Bimetallic  Par,  p.  5. 

2  Bimetallism ,  p.  5. 


TYPES    OF    CURRENCY    SYSTEMS 

coin  into  sixteen  gold  dollars.  Official  coinage  laws  have 
fixed  these  ratios  arbitrarily,  with  more  or  less  regard  to 
the  market  value  of  the  metals  at  the  time  when  the  ratio 
was  fixed,  but  without  providing  any  practicable  means  of 
changing  the  official  ratio  if  the  market  ratio  should  de- 
part from  it. 

III.  The  gold  exchange  standard  is  so  called  because 
the  currency  issued  under  it  is  exchangeable  at  a  fixed 
ratio  with  gold.  The  gold  exchange  standard  differs  from 
the  single  metallic  standard  in  the  fact  that  it  contem- 
plates the  coinage  and  circulation  of  little  or  none  of  the 
standard  metal,  but  provides  means  (chiefly  by  govern- 
ment control  of  the  coinage)  for  keeping  token  coins  of 
cheaper  metal  at  a  fixed  value  in  standard  money.  This 
system  is  also  sometimes  called  "the  limping  standard," 
because  the  coins  of  one  metal  (as  silver)  limp  along  with- 
out the  privilege  of  free  coinage  behind  those  of  the  metal 
which  fixes  the  standard.  The  term  "limping  standard  " 
is  more  frequently  applied  to  the  status  of  those  countries 
which  have  unconsciously  drifted  into  a  coinage  system 
involving  the  large  use  of  overvalued  tokens;  while  the 
term  "  gold  exchange  standard  "  is  applied  to  the  status  of 
those  countries  which  have  adopted  gold  as  their  standard 
but  have  consciously  and  deliberately  issued  token  coins 
of  silver  for  current  use,  adjusted  as  far  as  practicable  to 
local  requirements  and  to  the  reduced  value  of  silver 
bullion.  The  most  conspicuous  examples  of  the  limping 
standard  are  France  and  the  other  countries  of  the 
Latin  Union.  The  history  of  British  India  represents  a 
transition  from  a  silver  through  a  limping  standard  to 
a  definite  gold  exchange  standard  in  1899.  The  gold  ex- 
change standard  was  adopted  in  the  Philippine  Islands  in 
1903,  in  the  republic  of  Panama  in  1904,  and  in  Mexico 
in  1905. 

Under  the  limping  standard  it  is  almost  inevitably  the 
case  that  coins  of  the  metal  which  is  denied  the  privilege 
of  free  coinage  are  of  less  intrinsic  value  than  their  face 

279 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

value.  They  are  kept  up  to  their  face  value  for  the  pur- 
poses of  money  by  various  devices  of  law.  The  most  im- 
portant element  in  maintaining  their  value  is  the  fact  that 
the  quantity  of  such  coins  is  limited.  A  certain  quantity 
of  coins  is  necessary  to  carry  on  the  business  of  a  com- 
mercial country.  The  limitation  of  the  quantity  of  coins 
which  can  be  produced  from  a  given  metal,  by  denying  to 
the  individual  owner  of  bullion  its  free  conversion  into 
coins,  operates  to  confer  upon  the  government  a  monopoly 
of  the  supply  of  such  coins.  The  fact  that  the  coins  are 
constantly  needed  for  carrying  on  the  customary  trans- 
actions of  the  community  creates  a  demand  which  ab- 
sorbs the  supply.  Another  element  in  giving  stability  of 
value  to  such  coins  is  the  fact  that  they  are  received  at 
their  face  value  by  the  government  for  public  dues.  This 
constitutes  a  sort  of  standing  offer  to  treat  them  as  equal 
to  the  standard  coins  and  has  a  powerful  influence,  where 
the  quantity  is  not  excessive,  in  keeping  them  at  the  value 
given  them  by  law.  Coins  of  this  character  cannot  be 
melted  down  as  bullion  without  loss.  This  prevents  the 
reduction  of  the  quantity  by  destruction  or  by  exporta- 
tion. If  such  coins  are  exported,  and  are  treated  in 
foreign  countries  as  equal  to  their  face  value  in  the  stand- 
ard metal,  it  is  only  because  they  can  be  returned  to  the 
country  where  they  are  issued  and  there  exchanged  for 
goods,  or  for  the  standard  metal,  at  their  face  value. 
Under  such  conditions,  they  constitute  essentially  metallic 
bills  of  exchange  upon  the  country  by  which  they  are 
issued  rather  than  a  part  of  the  world's  standard  money. 
IV.  Redeemable  government  paper  money  is  a  form 
of  promissory  note  issued  by  governments  in  even  de- 
nominations, promising  to  pay  certain  amounts  of  the 
standard  metal  on  demand.  Such  money  is  usually  made 
by  law  a  tender  for  debt  which  the  creditor  must  accept 
at  its  face  value.  Where  redemption  in  standard  metal 
for  the  full  amount  of  the  notes  is  maintained  without 
question,  a  limited  amount  of  such  paper  has  sometimes 

280 


TYPES    OF    CURRENCY    SYSTEMS 

been  kept  in  circulation  without  serious  disturbance  to 
the  monetary  system.  There  have,  however,  been  few 
cases  of  the  successful  issue  and  continued  use  of  redeem- 
able government  paper  money,  because  such  issues  have 
usually  been  resorted  to  by  governments  which  were  in 
difficulties  and  which  desired  to  make  a  forced  loan  from 
the  public  instead  of  a  voluntary  loan,  such  as  could  be 
made  by  the  issue  of  interest-bearing  bonds  or  similar 
securities. 

Government  paper  money  cannot  easily  be  regulated  in 
quantity  in  accordance  with  business  demands.  At- 
tempts at  such  regulation  must  be  more  or  less  artificial, 
because  government  paper  is  not  issued  in  response  to 
pressure  for  credit  in  the  money  market,  as  bank-notes  are, 
but  is  issued  to  meet  the  needs  of  the  state  or  at  the  judg- 
ment of  some  official.  If  the  quantity  becomes  excessive 
it  cannot  be  exported  like  money  of  standard  metal.  If 
it  is  redeemable  in  the  standard  metal  and  the  quantity 
becomes  excessive,  by  reason  either  of  an  increase  in  the 
quantity  of  paper  or  a  decline  in  the  volume  of  business, 
there  is  always  danger  that  demands  for  redemption  will 
impose  a  heavy  burden  upon  government  reserves  of 
metal.  The  government  is  subjected  to  much  greater  dif- 
ficulty than  a  bank  in  maintaining  the  redeemability  of 
such  money,  because  the  bank  has  means  for  calling  in  its 
money,  reducing  the  amount  which  it  lends  to  the  public, 
and  thereby  curing  the  excess  in  circulation  without  losing 
the  entire  amount  of  the  excess  from  its  reserves. 

V.  Irredeemable  government  paper  money  consists  of 
paper  promises  to  pay  the  standard  metal,  which  are  not 
kept,  or  of  printed  declarations  of  certain  units  of  value. 
Such  money  almost  invariably  falls  much  below  the  value 
which  it  purports  to  represent.  When  this  occurs  it  is 
said  to  "depreciate "  or  to  be  depreciated  paper.  The  fact 
of  depreciation  is  sometimes  partly  obscured  by  reversing 
the  proposition  and  declaring  that  the  standard  metal  has 
"appreciated"  or  is  "at  a  premium."  For  convenience 

281 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

in  conducting  retail  transactions,  where  depreciated  paper 
has  been  made  legal  tender  or  has  otherwise  become  the 
money  of  current  use,  such  transactions  at  home  are 
usually  expressed  in  the  paper,  which  is  treated,  for  the 
time  being,  as  the  standard.  This  results  in  much  con- 
fusion of  thought  among  the  ignorant,  although  the  well- 
informed  are  aware  that  it  is  the  paper  which  has  de- 
preciated from  the  standard  in  coin  and  not  the  coin 
which  has  changed  its  essential  value.  Foreign  money 
markets,  moreover,  rarely  take  note  of  this  device,  but  by 
quoting  the  "gold  premium"  on  exchanges  apply  the  rigid 
test  of  the  relation  of  the  paper  currency  to  the  gold 
currency  of  the  world. 

Irredeemable  paper  is  governed  in  its  value  to  some 
extent  by  the  quantity  in  use,  as  in  the  case  of  redeemable 
paper,  but  it  is  influenced  by  other  causes,  among  which 
the  most  influential  is  usually  the  degree  of  discredit  at- 
taching to  the  government  which  issues  it  and  the  degree 
of  probability  that  the  paper  will  at  some  future  time  be 
redeemed  in  coin  of  the  standard.1  In  many  countries 
which  have  issued  such  depreciated  paper  in  large  quan- 
tities, it  has  been  thought  best,  when  the  paper  has  been 
restored  to  a  fixed  metallic  value,  to  adopt  a  new  unit  of 
coinage  corresponding  to  the  metallic  value  of  the  paper 
at  the  time  when  redemption  is  established.  This  sys- 
tem results  in  repudiation  of  a  part  of  the  original  prom- 
ise to  pay  standard  metal  in  full  for  the  paper,  but  is 
defensible  to  some  extent  upon  the  ground  that  it  con- 

1  Thus,  in  regard  to  the  depreciation  of  the  notes  issued  by  the 
United  States  during  the  Civil  War,  it  was  declared  by  Mitchell: 
"This  depreciation,  slight  at  first,  increased  steadily,  with  favor- 
able reactions  when  Federal  victories  seemed  to  promise  an  early 
end  to  the  war.  The  maximum  monthly  average  was  reached  in 
July,  1864,  when  a  dollar  note  sold  for  38.7  cents  in  gold.  After 
that  month  the  value  of  the  greenbacks  gradually  rose,  under  the 
stimulus  of  military  success,  until  a  month  after  the  surrender  of 
Lee  a  dollar  in  currency  was  worth  nearly  74  cents  in  gold."- 
fournal  of  Political  Economy  (March,  1897),  V.,  p.  125. 

282 


TYPES    OF    CURRENCY    SYSTEMS 

forms  to  conditions  as  they  exist  when  convertibility 
between  coin  and  paper  is  restored,  instead  of  chang- 
ing the  relations  of  contracts  and  prices  as  they  then 
stand. 

VI.  Redeemable  bank-notes  are  the  printed  promises 
of  a  bank  to  pay  coin  of  the  standard  metal  on  demand  to 
the  full  face  value  of  the  notes.     Where  such  promises  are 
scrupulously  fulfilled,  without  cost  or  difficulty  for  the 
holder  of  the  notes,  and  with  ample  provision  for  the  full 
payment  of  the  notes  in  case  of  failure  of  the  bank,  the 
redeemable    bank  -  note    constitutes    the    most   effective 
auxiliary  to  coins  of  the  standard  metal  for  carrying  on 
business.     It  is  a  form  of  credit  by  which  the  use  of  coin  is 
economized  in  the  same  manner  as  by  the  use  of  checks, 
deposit  accounts,  and  clearing-house  settlements.     It  is 
not  necessary  that  redeemable  bank-notes  should  be  legal 
tender  for  debt,  because  they  will  always  be  acceptable  for 
debts  where  complete  confidence  prevails  that  the  promise 
made  by  the  note  will  be  kept. 

The  issue  of  redeemable  bank-notes  has  been  restricted 
in  most  European  countries  by  recent  laws  to  a  single 
institution  with  large  capital,  like  the  Bank  of  France,  the 
Imperial  Bank  of  Germany,  the  Bank  of  England,  the 
Bank  of  Russia,  and  the  Austro-Hungarian  Bank;  but  the 
power  of  issue  is  distributed  among  a  plurality  of  smaller 
institutions  in  Scotland,  Switzerland,  Canada,  and  the 
United  States.  The  large  central  banks  are  more  or  less 
under  the  influence  of  the  state,  and  in  several  cases 
the  governor  of  the  bank  is  appointed  by  the  government ; 
but  these  banks  are  not  owned  by  the  government  except 
in  the  case  of  the  Bank  of  Russia.  They  are  like  other 
joint-stock  companies  in  their  relations  with  their  share- 
holders and  with  the  business  community,  except  for 
unusual  cases  of  interference. 

VII.  Irredeemable  bank-notes  are  promises  issued  by  a 
bank  to  pay  standard  coin  on  demand,  but  which  are  not 
redeemed  in  accordance  with  the  promise.     Such  notes 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

have  most  of  the  defects  of  irredeemable  government 
paper,  but  if  they  are  not  legal  tender  for  debt  they  do  not 
inflict  the  same  injustice  upon  persons  who  have  made 
contracts  expressed  in  standard  coin,  because  such  con- 
tracts cannot  be  lawfully  discharged  in  depreciated  notes. 
Experience  has  shown  that  irredeemable  bank-notes  do 
not  usually  decline  in  value  so  much  as  irredeemable 
government  notes,  because  the  quantity  is  subject  to  some 
degree  of  regulation  by  the  bank  by  which  they  are  issued. 
In  most  cases,  moreover,  where  bank-notes  have  become 
irredeemable  by  inability  of  the  banks  to  pay  them  in  coin, 
the  government  has  enforced  a  return  to  payment  in  coin 
within  a  shorter  time  than  where  government  notes  have 
been  issued.  The  government  has  less  interest  in  per- 
mitting the  continued  issue  of  promises  which  are  not  re- 
deemed by  the  bank  than  in  the  issue  of  its  own  promises 
of  the  same  character,  and  the  public  have  little  or  no 
interest  in  continuing  privileges  to  banks  which  fail  to 
redeem  their  promises. 

Of  these  various  currency  systems  there  is  hardly  any 
country  where  transactions  are  carried  on  by  one  alone, 
without  the  aid  of  one  or  more  of  the  other  systems  as 
auxiliaries.  In  most  countries  not  less  than  two  forms  of 
currency,  and  in  many  countries  a  great  many  combina- 
tions and  variations  of  the  seven  classes  which  have  been 
enumerated,  are  employed  in  monetary  dealings. 

The  ideal  currency  system,  from  the  stand-point  of  most 
scientific  students  of  the  subject,  is  that  which  combines 
the  single  metallic  standard  with  the  issue  of  convertible 
bank-notes.  Under  such  a  system,  where  the  standard 
metal  is  coined  freely  and  without  charge,  or  with  only  a 
nominal  charge,  upon  deposit  of  bullion  at  the  mints  by 
any  holder  of  it,  the  metallic  money  of  the  country  is  re- 
sponsive to  the  influences  of  the  demand  for  standard 
metal  throughout  the  world.  The  money  of  the  standard 
metal  comes  and  goes  according  to  the  state  of  prices  and 
rates  of  interest  for  capital.  If  gold  is  the  standard,  these 

284 


TYPES    OF    CURRENCY    SYSTEMS 

influences  operate  upon  the  demand  for  a  medium  of  ex- 
change, and  particularly  upon  the  foreign  exchanges,  in 
such  a  way  as  to  bring  gold  into  the  country  when  it  is 
scarce  in  relation  to  the  gold  stock  in  other  countries,  and 
send  gold  out  of  the  country  when  it  becomes  excessive  in 
relation  to  the  stock  of  the  world.  When  the  stock  of 
gold  is  deficient,  rates  of  interest  rise  and  this  attracts  gold 
from  other  countries.  If  the  supply  is  so  great  as  to  bring 
rates  down  below  those  in  other  countries,  other  things 
being  equal,  the  rate  of  interest  falls  and  it  becomes  profit- 
able to  send  gold  out  of  the  country.  Thus,  a  country 
having  a  currency  consisting  of  nothing  but  a  single  metal 
finds  its  currency  governed  by  an  almost  automatic  law, 
without  intervention  of  the  authority  of  the  state  and  by 
the  simple  play  of  the  self-interest  of  the  mercantile  classes 
in  all  countries  having  the  same  metallic  standard. 

A  monetary  system  which  is  based  upon  a  single  metallic 
standard,  with  free  coinage  of  the  standard  metal,  con- 
forms most  nearly  to  the  condition  that  money  shall  al- 
ways be  equal  in  intrinsic  value  to  its  exchange  value.  In 
other  words,  the  metal  in  a  new  coin,  fresh  from  the 
mints,  melts  up  into  an  amount  of  the  metal  equal  in 
market  value  to  the  face  value  of  the  coin.  Such  a  coin- 
age enters  readily  into  the  system  of  international  trade, 
because  the  coins  of  one  country  can  be  melted  up  and 
recoined  into  those  of  another  without  loss.  Exports  and 
imports  of  the  standard  metal,  whether  in  coin  or  bullion, 
are  not  hampered  by  any  loss  upon  the  conversion  of  one 
coin  into  another. 

The  use  of  convertible  bank-notes  affords  an  economy 
in  the  use  of  the  standard  metal  of  the  same  character  as 
the  economy  provided  by  other  forms  of  credit.  It  affords 
a  convenient  tool  of  trade,  meeting  all  the  purposes  of 
currency,  without  requiring  the  heavy  investment  re- 
quired in  a  currency  of  the  standard  metal.  The  coins  of 
the  standard  metal  and  the  notes  redeemable  in  the  stand- 
ard co-operate  with  each  other  to  meet  legitimate  de- 

285 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

mands  for  currency  in  the  most  economical  and  efficient 
manner  and  to  put  a  restraint  upon  undue  expansion  of 
the  volume  of  money  in  circulation.  The  fact  that  the 
notes  must  be  redeemed  on  demand  in  standard  coins 
prevents  their  issue  in  excessive  amounts,  because  in  such 
case  they  come  back  rapidly  for  redemption  and  the 
issuing  bank  is  compelled  to  take  measures  to  obtain  coin 
to  replace  its  diminishing  stock  and  to  continue  the  re- 
demption of  its  notes.  Under  the  operation  of  such  a 
system,  the  volume  of  metallic  money  and  the  volume  of 
paper  currency  adjust  themselves  automatically  to  the 
needs  of  trade. 

A  system  of  free  coinage  of  the  standard  metal  with  the 
employment  of  convertible  bank-notes  is  substantially  the 
system  of  England,  Germany,  Russia,  Australia,  and 
Egypt.  The  last  two  countries  named  come  nearer  than 
almost  any  others  in  the  world  to  the  employment  of  a 
currency  consisting  simply  of  the  standard  metal.1  The 
large  production  of  gold  in  Australia  causes  the  general 
use  of  gold  coin  and  has  prevented  the  introduction  of 
bank-notes  in  a  large  ratio  to  the  metallic  currency.  In 
Egypt  the  limited  field  within  which  bank-notes  are  em- 
ployed, owing  to  the  lack  of  extension  of  the  credit  system, 
causes  the  circulation  to  consist  chiefly  of  gold.  In  Eng- 
land, Germany,  and  Russia  gold  coin  is  the  standard  of 
value  and  is  in  general  circulation,  but  convertible  bank- 
notes are  also  largely  used. 

In  nearly  all  countries  the  currency  system,  even  where 
consisting  essentially  of  a  single  metallic  standard  and 
convertible  notes,  contains  two  other  classes  of  coins — 
subsidiary  silver  coins  and  minor  coins  of  copper  or  some 
other  metal.  These  coins  almost  invariably  contain  metal 

1  In  Australasia  gold  constitutes  $22.96  per  capita  in  a  circula- 
tion of  $24.05;  but  the  gold  is  partly  represented  in  actual  use  by 
bank-notes.  In  Egypt  gold  constitutes  $3.06  per  capita  in  a  cir- 
culation of  $3.71. — Report  of  the  Director  of  the  U.  S.  Mint,  1904, 

P-  43 

286 


TYPES    OF    CURRENCY    SYSTEMS 

of  less  value  as  bullion  than  the  nominal  value  of  the  coins. 
If  the  coins  contained  metal  of  greater  value  as  bullion 
than  their  nominal  value,  they  would  be  melted  up  as 
bullion  and  the  country  would  be  deprived  of  its  small 
money.  These  subsidiary  and  minor  coins  are  now  issued 
in  civilized  countries  from  purchases  of  bullion  on  its  own 
account  by  the  government,  which  is  thus  enabled  to  keep 
the  quantity  within  such  limits  as  it  thinks  proper.  Such 
limitation  of  the  quantity  to  the  amount  actually  needed 
in  retail  transactions  keeps  the  coins  at  their  face  value 
independently  of  the  value  of  the  bullion  which  they  con- 
tain. 

The  minor  token  coins  usually  play  no  part  in  determin- 
ing the  monetary  standard  of  the  country,  because  they  are 
not  legal  tender  for  unlimited  amounts.  In  the  United 
States  they  are  redeemable  by  the  government  in  legal- 
tender  money  and  can  themselves  be  tendered  for  debts 
between  individuals  only  to  the  maximum  amount  of  ten 
dollars  in  the  case  of  subsidiary  silver  and  twenty -five 
cents  in  the  case  of  minor  coins.1  Like  provisions  in  other 
countries  also  reduce  these  coins  to  a  subordinate  posi- 
tion in  the  currency  system  and  deprive  them  of  any  in- 
fluence upon  the  standard  of  value.  They  are  a  form  of 
credit  currency  which  would  be  dangerous  if  abused,  but 
within  proper  limits  forms  a  safe  and  convenient  auxil- 
iary to  standard  coins  and  redeemable  bank-notes. 

The  limping  standard  is  not  so  simple  and  scientific  as 
the  single  metallic  standard  with  convertible  bank-notes; 
but  it  has  been  an  historical  evolution  in  countries  where 
bimetallism  has  broken  down.  In  those  countries,  which 
include  the  United  States,  France,  Belgium,  Italy,  and 
Switzerland,  it  has  been  found  necessary,  while  leaving  the 
mints  open  to  the  free  coinage  of  gold,  to  close  them  to  the 
free  coinage  of  silver.  When  this  suspension  of  free  coin- 
age occurred,  large  amounts  of  coins  of  both  metals  were  in 

•Revised  Statutes,  §§  3529  and  3587;  Act  of  June  9,  1879, 
§  2. 

287 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

circulation.  It  has  not  been  profitable  to  retire  the  coins 
of  the  cheaper,  because  they  would  be  worth  less  as  bullion 
than  as  coin. 

A  still  further  complication  in  the  currency  in  actual  use 
is  introduced  where  government  paper  money  circulates 
alongside  of  coins  and  convertible  notes.  Government 
paper  usually  tends  to  drive  from  circulation  all  other 
forms  of  money  in  the  fields  which  it  seeks  to  enter.  This 
is  true  to  some  extent  even  where  the  paper  is  convertible 
and  is  more  nearly  certain  to  be  the  case  where  the  paper 
is  inconvertible.  In  the  latter  case  especially,  if  the  paper 
is  legal  tender,  it  brings  into  operation  the  economic 
tendency  known  as  "  Gresham's  law."  This  law  is  so  call- 
ed because  it  was  first  clearly  set  forth  by  Sir  Thomas 
Gresham,  the  master  of  the  English  mint,  about  1559. 
It  is,  in  brief,  "that  bad  money  drives  out  good."  Re- 
duced to  scientific  terms,  it  is  a  result  of  the  law  of  mar- 
ginal utility.  When  the  holder  of  a  doubtful  promise  to 
pay  gold  and  a  piece  of  gold,  nominally  expressing  the 
same  amounts,  finds  that  the  paper  can  be  used  to  pay 
debts  to  the  same  amount  as  the  gold,  while  the  gold  can 
be  sold  at  a  higher  paper  price  to  the  bullion  broker,  he 
naturally  employs  the  paper  in  making  purchases  and  pay- 
ing debts  and  withdraws  the  gold  to  sell  it  in  the  bullion 
market.  The  paper  has  the  higher  utility  to  the  holder  in 
exchange  for  commodities,  while  the  gold  has  the  higher 
utility  for  him  as  merchandise  at  the  bullion  broker's. 
Under  such  conditions  the  law  of  marginal  utility  will 
lead  the  holder  of  money  to  substitute  the  cheaper  for 
the  more  costly  instrument  which  will  perform  the  same 
service.1  This  process  of  substitution  will  result  in  the  use 

1  Thus,  Simon  Newcomb  says,  "We  always  prefer  for  any  purpose 
the  cheapest  article  which  will  answer  that  purpose,  unless  some 
evil  to  the  person  using  it  attends  its  use.  ...  If  there  was  a  com- 
munity which  had  to  make  silver  axes  because  it  had  no  steel,  we 
should  find  that  when  that  community  began  to  trade  with  the 
rest  of  the  world,  the  silver  axes  would  entirely  disappear  and  be 

288 


TYPES    OF    CURRENCY    SYSTEMS 

of  the  cheapest  form  of  currency  which  will  do  a  given  work, 
because  the  more  costly  can  be  otherwise  employed  at  a 
profit.  Even  when  paper  and  gold  circulate  at  par  with 
each  other,  the  paper  will  be  employed  for  most  trans- 
actions, both  because  it  is  a  cheaper  form  of  currency,  in 
requiring  a  smaller  investment  of  capital,  and  because  it 
can  be  transmitted  with  greater  convenience  and  at  lower 
charges  for  carriage.  Gresham's  law  will,  therefore,  re- 
sult in  the  substitution  of  a  paper  for  a  gold  currency  in 
most  cases  in  all  the  denominations  where  paper  is  per- 
mitted. This  fact  affords  the  economic  justification  for 
two  important  practical  regulations  of  modern  banking — 
the  limitation  of  the  minimum  denomination  of  bank-notes 
and  the  requirement  of  definite  metallic  reserves.  Both 
these  regulations  are  justified  by  the  necessity  for  main- 
taining a  safe  metallic  basis  for  the  currency,  which  might 
be  neglected  if  the  struggle  of  individual  issuers  for  the 
greatest  economy  in  the  tools  of  exchange  were  left  un- 
hampered. 

Most  of  the  European  countries  have  a  currency  made 
up  of  gold  coin  as  the  standard,  silver  and  minor  coins 
which  are  tokens,  and  redeemable  bank-notes.  The 
currency  systems  of  Great  Britain,  Germany,  Russia,  and 
Canada,  in  spite  of  unnecessary  restrictions  on  notes  in 
the  first  two,  conform  most  nearly  to  the  ideal  system  in 
some  respects,  because  they  have  in  use  the  largest  pro- 
portion of  gold  coins,  and  bank-notes  issued  in  those  coun- 
tries are  redeemable  in  gold  on  demand.  The  redemption 
of  bank-notes  in  gold  has  been  suspended  for  some  time  in 
Italy,  Austria-Hungary,  Spain,  and  Greece,  but  Italy  and 
Austria-Hungary  have  recently  taken  steps  to  restore 
gold  payments. 

The  forms  of  money  in  use  in  the  United  States  afford 
an  example  of  nearly  every  system,  because  the  existing 

replaced  by  iron  or  steel  ones.  The  case  is  exactly  the  same  when 
gold  is  replaced  by  paper." — Principles  of  Political  Economy,  p. 
414. 

i.— 19  289 


THE  PRINCIPLES  OF  MONEY  AND  BANKING 

currency  has  been  a  gradual  growth  out  of  complex  his- 
torical and  economic  conditions.  Not  less  than  eight 
kinds  of  money  form  parts  of  the  active  circulation,  but 
they  fall  into  four  of  the  types  into  which  currency  systems 
are  here  divided — coins  of  the  standard  metal,  token  coins, 
redeemable  government  paper,  and  redeemable  bank 
paper.  Gold  coin  is  the  standard  and  exists  in  large 
quantities  in  the  country,  but  most  of  it  is  in  the  bank 
reserves  and  in  the  Treasury  and  is  not  in  general  use. 
Standard  silver  dollars  to  the  amount  of  more  than 
$500,000,000  are  now  a  part  of  the  token  currency,  along 
with  subsidiary  silver  pieces  of  smaller  denominations, 
whose  amount  in  1905  was  about  $115,000,000.  The 
minor  coins  of  nickel  and  bronze  fall  under  the  same 
classification  as  token  coins,  which  derive  their  value  from 
limitation  of  the  quantity  and  willingness  of  the  govern- 
ment to  receive  them  at  par. 

A  large  part  of  the  currency  of  the  United  States  falls, 
in  a  sense,  under  the  classification  of  government  paper 
money.  There  are  four  forms  of  this  paper.1  Two  of 
them,  however,  are  not  government  paper  money  in  the 
scientific  sense  and  are  not  subject  to  the  principal  criti- 
cisms usually  pronounced  upon  such  money.  They  are 
simply  receipts  or  certificates  given  to  the  owners  of  coin 
that  such  coin  has  been  received  and  is  held  for  them  in 
trust.  They  are  known  as  gold  certificates  and  silver 
certificates.  The  gold  certificates  are  not  paper  money 
in  the  usual  sense,  because  they  represent  gold  coin  of 
full  value  instead  of  promises  to  pay  which  there  may  not 
be  the  ability  to  fulfil.  They  are  issued  to  save  the  wear 
and  tear  attendant  upon  the  transfer  of  gold,  especially  in 
the  dealings  carried  on  daily  between  the  New  York 

1  Thus  the  total  circulation  on  June  i,  1905,  was  $2,584,670,716, 
of  which  these  four  forms  of  paper  were  represented  by:  gold 
certificates,  $482,910,999;  silver  certificates,  $460,462,103;  United 
States  notes,  $332,284,693;  treasury  notes  of  1890,  $9,583,291;  or 
a  total  of  about  $1,285,000,000. 

290 


TYPES    OF    CURRENCY    SYSTEMS 

banks  and  the  Sub-Treasury  of  the  United  States.  Of  the 
payments  for  customs  duties  made  to  the  Treasury  at 
New  York  during  the  fiscal  year  1902,  $155,369,917  was 
paid  in  gold,  and  nearly  all  in  gold  certificates,  out  of  total 
payments  of  $165, 443, 740. * 

The  issue  of  silver  certificates  was  authorized  when  the 
purchase  of  silver  bullion  for  coinage  into  standard  silver 
dollars  was  determined  upon  by  Congress  in  1878.  It 
was  plainly  provided  that  "the  coin  deposited  for,  or  rep- 
resenting the  certificates,  shall  be  retained  in  the  Treas- 
ury for  the  payment  of  the  same  on  demand."2  These 
certificates  do  not  represent  redeemable  government  paper 
in  the  ideal  sense,  because  they  are  redeemable  in  token 
coins  and  not  in  coin  of  the  standard  metal.  They  are 
received,  however,  for  debts  to  the  government  at  their 
face  value  in  gold,  which  tends  to  prevent  their  deprecia- 
tion and  that  of  the  coins  which  they  represent.  This 
fact  led  to  their  payment  in  large  amounts  for  customs 
dues  during  the  crisis  of  1893,  while  the  gold  which  had 
usually  been  paid  was  retained  by  banks  and  individuals 
as  having  a  more  assured  value. 

The  typical  government  paper  money  of  the  United 
States  consists  of  what  are  called  "United  States  notes" 
or  "greenbacks."  These  were  first  authorized  in  1862 
and  their  issue  rose  to  a  maximum  (January  3,  1864)  of 
$449,338,902.'  No  attempt  was  made  to  treat  them  as 
redeemable  notes  at  the  time  of  their  issue,  and  their 
value  fell  greatly  in  gold  during  the  Civil  War,  but  began 
to  rise  after  the  war  closed  and  when  some  steps  were 
taken  to  reduce  the  amount  and  to  accumulate  a  gold 
reserve  for  their  redemption.  They  became  redeemable 
in  gold  on  January  i,  1879,  and  a  few  days  before  that 
date  the  premium  on  gold  in  New  York  disappeared  and 
the  gold  room  on  the  Stock  Exchange  was  closed.  The 

1  Treasurer's  Report,  1902,  p.  26. 
'Act  of  February  28,   1878,  §3. 
1  Knox,  United  States  Notes,  p.  139. 
291 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

tendency  towards  the  contraction  of  the  currency  in  1878 
led  Congress  to  intervene  to  check  the  retirement  of  the 
notes  and  to  direct  that  the  secretary  of  the  Treasury 
should  thereafter  pay  out  and  reissue  all  which  were 
received.  The  secretary  was  necessarily  compelled  to 
obey  this  mandate  from  the  moment  it  took  effect,  when 
the  volume  of  notes  outstanding  happened  to  represent 
the  uneven  sum  of  $346,681,016.  For  a  quarter  of  a  cen- 
tury the  volume  of  government  paper  money  nominally 
outstanding  has  remained  fixed  at  this  amount.  A  part 
of  it  is  usually  in  the  Treasury,  but  is  held  there  as  the 
equivalent  of  coin  and  is  paid  out  for  current  cash  obliga- 
tions, instead  of  being  cancelled  and  withdrawn  from  use, 
as  is  the  case  with  redeemable  bank-notes. 

The  other  form  of  government  paper  still  in  circulation 
in  the  United  States  was  authorized  in  1890,  when  the 
government  decided  to  increase  its  purchases  and  coinage 
of  silver.  Notes  were  then  issued,  called  treasury  notes, 
to  the  exact  amount  of  the  silver  bullion  purchased  for 
coinage.  They  differed  from  silver  certificates  in  the  fact 
that  they  were  redeemable  at  the  discretion  of  the  secre- 
tary of  the  Treasury  in  either  gold  or  silver  coin.  It  was 
decided  by  Congress  to  withdraw  these  notes  when  the 
gold  standard  was  strengthened  in  1900,  and  it  was  direct- 
ed that  whenever  afterwards  received  they  should  be  re- 
deemed in  silver  dollars  and  retired.  They  will  gradually 
disappear  from  circulation,  therefore,  and  reduce  the 
number  of  forms  of  money  in  use  in  the  United  States  to 
seven.  The  total  amount  of  treasury  notes  issued  in  pay- 
ment for  silver  bullion  was  $155,931,002  ;  the  amount  out- 
standing June  30,  1905,  had  fallen  to  $9,413,000. 

The  other  form  of  money  employed  in  the  United  States 
consists  of  redeemable  bank-notes.  These  notes,  known 
as  national  bank-notes,  differ  in  character  from  those 
issued  in  most  countries  in  being  based  upon  deposits  of 
government  bonds  in  the  public  Treasury  instead  of  on  the 
commercial  assets  of  the  banks.  This  makes  them  less 

292 


TYPES    OF    CURRENCY    SYSTEMS 

responsive  to  business  conditions  than  the  bank-note  is- 
sues of  other  countries,  but  they  have  enjoyed  since  1879 
a  considerable  advantage  over  irredeemable  bank-notes, 
which  have  proved  so  injurious  to  the  finances  of  Italy, 
Spain,  and  Greece.  National  bank-notes  are  redeemable 
in  lawful  money  instead  of  being  specifically  redeemable 
in  coin,  as  sound  monetary  principles  require.  This  makes 
little  difference  so  long  as  the  paper  money  of  the  govern- 
ment remains  limited  in  amount  and  is  redeemed  in 
standard  coin,  but  would  reduce  the  notes  to  the  level  of 
government  issues  if  the  government  should  again  issue 
irredeemable  paper.  This  was  in  fact  the  status  of  na- 
tional bank-notes  from  the  time  of  their  issue  in  1864  to 
the  resumption  of  specie  payments  by  the  government  in 
1879.  All  forms  of  money  issued  in  the  United  States 
since  that  date  have  been  kept  equal  to  gold,  although  gold 
has  formed  only  a  fraction  of  the  money  in  use. 


II 

THE    FAILURE   OF   LOCAL   BIMETALLISM 

Its  relation  to  the  introduction  of  the  gold  standard — The  French 
legislation  of  1803,  making  the  franc  the  coinage  unit — Ebb 
and  flow  of  gold  across  the  French  frontier  under  changing  re- 
lations in  the  bullion  market — Formation  of  the  Latin  Union  to 
guard  against  the  rise  of  silver — Change  of  conditions  about 
1873 — Policy  of  the  United  States  regarding  the  standard — 
The  legislation  of  1873  and  the  Bland  and  Sherman  acts. 

IN  logical  order,  discussion  of  the  single  metallic  stand- 
ard should  precede  discussion  of  the  double  or  bime- 
tallic standard;  but  historically  the  floundering  of  the 
nations  through  various  forms  of  bimetallism  (often  not 
distinctly  recognized  as  such)  preceded  their  emergence, 
in  the  closing  generation  of  the  nineteenth  century,  upon 
the  firm  ground  of  the  single  gold  standard,  definitely  rec- 
ognized and  scientifically  guarded.  As  the  failure  of  the 
earlier  experiments  preceded  in  time  the  evolution  of  the 
gold  standard,  and  throws  much  light  upon  that  evolution, 
and  the  latter  brought  in  its  turn  difficulties  in  trade  re- 
lations with  silver-using  countries,  which  caused  a  tem- 
porary reaction  in  certain  sections  of  scientific  thought 
towards  the  theory  of  bimetallism,  the  historical  order, 
rather  than  the  logical  order,  will  be  followed  in  some 
degree  in  dealing  with  these  developments. 

Bimetallism  has  found  scientific  defenders  upon  the 
ground  that  it  affords  distinct  advantages  as  a  monetary 
system  over  monometallism.  Few  have  denied  that  it 
would  have  such  advantages  if  the  ratio  fixed  by  law  be- 
tween the  two  metals  could  be  maintained  in  the  bullion 

294 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

market.  Upon  this  point  the  contention  of  the  advocates 
of  bimetallism  was  thus  set  forth  with  clearness  and  pre- 
cision by  the  British  Gold  and  Silver  Commission:1 

"If  the  possessor  of  any  quantity  of  silver  could,  by 
taking  it  to  the  mints,  have  it  converted  into  coins  avail- 
able as  legal  tender  at  a  fixed  ratio  with  gold,  he  would 
never  part  with  it  except  at  a  gold  price  closely  approxi- 
mating to  the  value  represented  by  that  ratio.  The 
variations  in  the  gold  price  of  silver  would,  therefore,  be 
scarcely  appreciable." 

Whether  this  statement  is  supported  by  facts  and  sound 
reasoning  is  the  crux  of  the  dispute  regarding  the  prac- 
ticability of  bimetallism.  Two  questions  are  raised  by 
the  position  of  the  bimetallists : 

(1)  Whether   the    adoption    of   a   bimetallic   coinage 
system  would  modify  the  relations  of  value  which  would 
otherwise  exist  between  gold  and  silver. 

(2)  Whether,  if  such  modifying  influence  is  granted,  it 
would  be  of  such  a  character  as  to  give  absolute  fixity  to 
the  relationship  between  the  two  metals  ? 

Towards  a  correct  solution  of  these  questions  it  will  be 
necessary  to  consider  such  historical  facts  as  are  available 
and  afterwards  the  reasoning  based  upon  these  facts  and 
upon  abstract  theory. 

The  most  conspicuous  test  of  the  system  of  keeping 
gold  and  silver  in  circulation  side  by  side  was  made  in 
France  from  1803  to  1873.  The  legal  ratio  between  the 
two  metals  was  fixed  in  1785,  upon  recommendation  of 
Calonne,  minister  of  finance,  at  15^  to  i.  In  1785  free 
coinage  of  gold  was  not  established  in  France,  but  such 
old  gold  coin  as  was  then  in  circulation  was  recoined  at  the 
new  valuation.  It  was  in  1803,  when  the  administrative 
and  financial  system  of  France  was  being  reorganized  by 
Napoleon,  that  the  French  bimetallic  system,  so-called, 
was  adopted.  The  ratio  of  15 £  to  i,  chosen  by  Calonne, 

1  Senate  Misc.  Doc.  No.  34,  soth  Congress,  ad  Session,  p.  60. 

295 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

was  then  retained,  and  provision  was  made  for  the  coinage 
of  both  metals.  The  French  law,  however,  was  not  so 
clearly  a  bimetallic  law  as  some  of  the  advocates  of  the 
system  in  modern  times  have  maintained.  Gaudin,  the 
minister  of  finance,  did  not  apparently  have  any  inkling 
of  modern  bimetallic  theories,  that  opening  the  mints  to 
both  metals  would  tend  to  maintain  their  relative  value 
by  affording  an  unlimited  outlet  for  the  cheaper  metal 
when  the  dearer  ceased  to  be  offered  for  coinage.  He 
adopted  a  ratio  which  was  nearly  the  market  ratio  of  silver 
and  gold,  but  which  slightly  undervalued  gold  and  would 
therefore  tend  to  make  silver  the  standard  in  use  and  keep 
gold  out  of  circulation.  The  new  law,  moreover,  by  no 
means  adopted  consciously  the  bimetallic  system  in  the 
sense  in  which  it  is  now  generally  understood.  The  law 
simply  declared: 

"Five  grams  of  silver,  nine-tenths  fine,  constitute  the 
monetary  unit,  which  retains  the  name  of  franc." 

The  unit  of  the  French  monetary  system,  therefore,  was 
a  silver  coin.  It  was  simply  provided  that  gold  was  to  be 
coined  in  twenty  and  forty-franc  pieces  at  the  fixed  ratio 
of  15^  to  i.  Gaudin  had  heard  so  little  of  the  modern 
bimetallic  theory  that  his  first  project  contained  an  ex- 
plicit recognition  of  the  probability  that  the  rating  of  gold 
to  silver  might  require  to  be  altered  from  time  to  time ; 
but  this  was  stricken  from  the  plan  in  the  course  of  dis- 
cussion.1 

These  facts  are  important,  not  as  weakening  the  force 
of  abstract  arguments  for  bimetallism,  but  as  tending  to 
show  from  the  actual  record  of  events  that  bimetallism 
hardly  existed  even  as  an  abstract  conception  among  the 
statesmen  of  1803.  If  true  bimetallism  resulted  from  the 
operation  of  the  French  coinage  law,  it  was  the  result  of  the 
evolution  of  events,  and  this  would  be  in  some  senses  a 

1  Walker,  International  Bimetallism,  p.  88.  A  provision  of  this 
character  was  preserved  in  the  Belgian  Law  of  1832. — Vide  An- 
siaux,  La  Question  Monttaire  en  Belgique,  p.  8. 

296 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

more  important  evidence  than  academic  theories  of  the 
utility  of  such  a  system,  by  showing  its  adaptation  to 
actual  conditions.  We  shall  see,  however,  that  the  plan 
of  1803,  although  adopted  in  Belgium  in  1832  and  later 
by  Switzerland,  Italy,  and  Greece,  did  not  maintain 
among  the  money-changers  the  concurrent  estimation  of 
gold  and  silver  at  the  valuation  given  by  law.  On  the 
contrary  gold  flowed  into  the  country  and  came  to  the 
mints  when  gold  was  worth  less  than  the  mint  rate  in  re- 
lation to  silver;  gold  flowed  out  of  the  country  and  was 
not  brought  to  the  mints  when  it  was  worth  more  than  the 
mint  rate  in  relation  to  silver. 

Examination  of  the  coinage  and  the  foreign  trade 
statistics  will  illustrate  these  tendencies.  From  1803  to 
1848  the  circulation  of  France  was  almost  entirely  of 
silver.  From  1795  to  ^47  gold  formed  22.9  per  cent,  of 
the  coinage  of  the  two  metals,  silver  77.1.  From  1830  to 
1848  gold  was  only  10.9  per  cent,  and  silver  was  89. i.1 
The  movement  of  foreign  trade  showed  that  up  to  1837, 
so  far  as  the  figures  are  available,  there  was  a  slight  excess 
in  exports  of  gold  over  imports,  while  the  net  imports  of 
silver  amounted  to  1,032,000,000  francs  ($200,000,000). 
It  cannot  be  assumed,  however,  that  the  absence  of  heavy 
net  exports  of  gold  from  France  indicates  the  continuance 
of  the  use  of  gold  as  currency.  France  was  not  a  gold- 
producing  country  and  it  is  not  an  unreasonable  assump- 
tion that  for  thirty-five  years  her  consumption  of  gold  by 
jewelers  and  by  other  artisans  equalled  10,000,000  francs 
a  year  or  350,000,000  francs  ($69,000,000)  in  thirty-five 
years.3  Obviously  such  a  use  of  gold  made  a  material 
deduction  from  the  stock  in  use  as  currency. 

The  question  whether  gold  disappeared  from  circulation 
in  France  during  the  period  ending  with  the  great  gold 

'Willis,  p.  5. 

1  "There  is,  furthermore,  reason  to  believe  that  the  exports  of 
gold  consisted  chiefly  of  coin,  while  the  imports  of  gold  were  largely 
of  bullion,"— Willis,  p.  4. 

297 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

discoveries  about  1850,  and  thereby  demonstrated  the 
breakdown  of  the  bimetallic  system,  has  been  warmly 
debated,  but  it  appears  to  be  largely  a  question  of  opinion 
as  to  what  constituted  a  gold  circulation.  Walker  en- 
deavors to  show  that  "  although  silver  was  being  imported 
to  an  enormous  extent,  because  overvalued  in  the  coinage, 
gold  still  remained  money  in  France  in  appreciable  quan- 
tities."1 Whether  "appreciable  quantities"  remained  or 
not  seems  to  be  somewhat  apart  from  the  question  whether 
concurrent  circulation  was  successfully  maintained.  It 
was  declared  by  a  French  official  report  in  1872  that  up  to 
1850  "silver  was  our  sole  monetary  circulation."  An- 
other report,  made  in  1869,  quoted  Gaudin  as  estimating 
that  in  1803  one-third  of  the  metallic  circulation  of  France 
was  of  gold,  but  declared  that  in  1848  almost  all  of  this 
gold  had  disappeared  and  out  of  53,000,000  francs  then 
possessed  by  the  Bank  of  France  only  1,000,000  francs  was 
in  the  yellow  metal.  It  was  customary  in  those  times 
that  "when  one  was  paid  even  so  small  a  sum  as  1,000 
francs,  he  received  this  bulky  and  heavy  money  in  a 
canvas  bag  and  had  to  hire  a  porter  or  a  cab  to  carry  it 
home."2 

Whatever  happened  in  France  prior  to  the  gold  dis- 
coveries of  1848,  there  is  little  dispute  as  to  what  oc- 
curred afterwards.  Gold,  by  reason  of  the  large  amount 
produced  in  California  and  Australia,  fell  below  silver  in 
value  at  the  French  coinage  ratio  and  began  to  pour  into 
the  French  mints  in  a  golden  torrent.  Silver  ceased  to 
reach  the  mints,  and  was  largely  exported,  but  at  a  rate 
which  did  not  entirely  offset  the  influx  of  gold.  This  was 
due  to  the  fact  that  the  increase  in  the  world's  supply  of 
metallic  money  permitted  a  larger  distributive  share  to 
fall  to  France.  Much  more  than  the  net  increase  was  in 
gold.  The  contrast  between  the  amount  of  coinage  of 
gold  and  silver  at  the  French  mints  before  and  after  the 

1  International  Bimetallism,  p.  126. 
*  Report  of  U.  S.  Monetary  Commission  of  1876,  p.  146. 
298 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

opening  of  the  California  mines  is  thus  graphically  pre- 
sented by  Arnaune" : l 

Average  com-  Gold  coined.  Silver  coined, 

PERIOD             mercial  ratio  francs                                     francs 

1821-1850...       15.76  453,174,270  3,190,913,437 

1851-1870...       15.44  6,436,080,610                         528,138,619 

Thus,  with  a  change  of  little  more  than  two  per  cent,  in 
the  average  ratio  of  the  two  periods,  the  percentage  of  gold 
coinage  changed  from  about  one  in  eight  parts  of  value  to 
about  twelve  parts  in  thirteen.  The  experience  of  France 
under  this  avalanche  of  gold  is  one  of  the  arguments  most 
dwelt  upon  by  bimetallists  to  prove  the  value  of  a  double 
or  bimetallic  standard.  They  maintain  that  if  the  French 
mints  had  not  been  thrown  open  to  gold,  and  the  laws  of 
France  had  made  silver  the  sole  legal  tender,  the  new  gold 
would  have  been  pent  up  in  the  old  gold  countries,  would 
have  produced  by  its  increase  of  volume  a  disturbing  rise 
of  prices,  and  would  have  cheapened  the  yellow  metal  to  a 
point  which  would  have  carried  it  far  below  the  ratio  of 

JSi  to  i- 

It  is  certain,  however,  that  under  actual  conditions  the 
bimetallic  law  failed  to  keep  gold  and  silver  together. 
Before  the  discovery  of  the  Calif ornian  mines  gold  was  at 
a  premium  in  silver,  sometimes  as  high  as  three  per  cent.2 
After  1848  silver  was  at  a  premium  in  gold,  sometimes  as 
high  as  four  per  cent.,  with  the  result  that  the  bullion 
brokers  were  kept  constantly  employed  and  that  in  six 
years  (1852-57)  the  exportation  of  silver  exceeded  the 
importation  by  1,127,000,000  francs  ($217,500,000), 

1  La  Monnaie,  le  Credit,  et  le  Change,  p.  172. 

1  Cauwes,  II.,  p.  189.  Even  Lord  Aldenham  declares:  "I  re- 
member myself,  when  I  was  travelling  through  France  in  1841,  I 
paid  some  very  insignificant  agio  to  the  Paris  banker  for  giving  me 
gold  instead  of  five-franc  pieces.  The  agio  is  only  concerned  with 
export  of  bullion,  coined  or  uncoined,  whether  in  the  course  of 
trade  or  for  the  convenience  of  travellers." — A  Colloquy  on  Cur- 
rency, p.  63. 

299 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

which  was  about  two-fifths  of  the  original  stock  of  silver 
in  France.1 

The  outlet  afforded  by  France  for  the  new  gold  un- 
doubtedly contributed  to  widen  the  circle  of  demand  for 
the  metal  and  thereby  to  maintain  its  value.  The  effect 
of  the  depreciation  which  would  have  fallen  upon  gold 
without  the  French  mint  laws,  however,  and  the  dis- 
turbing effects  upon  values  and  prices  which  were  actually 
felt,  were  greatly  exaggerated  at  the  time  and  have  been 
greatly  exaggerated  since.  Chevalier,  although  fully 
cognizant  of  the  French  bimetallic  law,  anticipated  that 
the  new  gold  would  raise  prices  by  fifty  per  cent.,  and 
Jevons  estimated  a  rise  of  thirty  per  cent.,  by  the  simple 
operation  of  the  increase  in  the  quantity  of  money  in  re- 
lation to  commodities.2  Nothing  of  the  kind  occurred  or 
probably  would  have  occurred  even  if  the  French  mone- 
tary laws  had  been  different. 

The  essential  weakness  of  the  reasoning  of  Jevons  was 
that  he  ignored  the  operation  of  one  of  those  economic 
principles  of  which  he  was  himself  a  leading  exponent — 
the  law  of  marginal  utility,  or  the  natural  selection  by 
men  of  the  most  efficient  and  economical  tools  for  accom- 
plishing the  maximum  of  results.  Gold  was  generally 
recognized  before  the  discoveries  of  1848  as  the  most  ef- 
ficient money  of  modern  commerce.  It  was  relatively 
scarce,  however,  and  therefore  difficult  to  obtain  except 
at  a  high  price  in  other  capital.  This  being  the  case,  even 
wealthy  nations  hesitated  to  adopt  gold  as  their  sole 
standard.  When  gold  became  relatively  plentiful,  a  de- 

1  Chevalier,  On  the  Probable  Fall  -in  the  Value  of  Gold,  p.  48. 
Chevalier  declares  that  "From  the  moment  that  numbers  of  per- 
sons devote  their  time  and  capital  to  the  carrying  out  of  this  sub- 
stitution, we  must  conclude  that  it  is  a  profitable  trade,  for,  if  the 
relation  of  i  to  15 J  were  not  advantageous  for  the  holders  of  gold, 
they  would  take  good  care  not  to  carry  on  the  operation  upon  the 
large  scale  on  which  they  have  proceeded." 

2  Investigations  in  Currency  and  Finance,  p.  74. 

300 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

mand  which  had  before  been  ineffective  because  of  the 
high  price  of  gold,  and  had  been  simply  lying  in  wait  for 
a  fall  in  its  price,  came  into  play  to  meet  the  increased 
supply.  A  desire  which  had  not  reached  the  character  of 
an  effective  demand  and  could,  therefore,  according  to 
economic  reasoning,  be  ignored,  thus  became  an  effective 
demand.  It  is  plain,  therefore,  why  France  absorbed 
more  gold  than  she  exported  silver.  She  needed  a  larger 
medium  of  exchange,  especially  in  her  rural  districts,  to 
meet  the  expansion  of  commerce  which  was  beginning 
with  the  development  of  new  means  of  production  and 
transportation.1 

In  Switzerland  the  attempt  to  adopt  the  French  silver 
system,  which  was  made  by  the  law  of  1850,  was  defeated 
by  the  fall  in  the  value  of  gold.  French  gold  coins  flooded 
the  country,  the  silver  five-franc  pieces  first  disappeared, 
and  the  subsidiary  pieces  of  one  and  two  francs  began  to 
follow  them.  Switzerland  by  a  law  of  1860  saved  her 
subsidiary  circulation  by  reducing  it  from  the  fineness  of 
nine-tenths  to  eight-tenths.  These  coins  were  intro- 
duced across  the  French  frontier  as  substitutes  for  the 
French  coins,  which,  by  reason  of  their  greater  fineness, 
were  melted  up  and  sold  as  bullion.2  Italy  adopted  the 
French  system  of  coinage,  but  with  subsidiary  coins  of 
the  fineness  of  0.835,  by  the  law  of  August  24,  1862,  and 
got  into  circulation  more  than  100,000,000  francs  in  the 
new  pieces  while  France  hesitated.3  At  length,  so  mani- 
fold were  the  difficulties  caused  by  the  undervaluation  of 
silver  in  all  the  countries  where  the  French  decimal  system 
prevailed,  that  an  international  conference  was  sum- 
moned, on  the  motion  of  Belgium,  for  considering  some 

1  Jevons  notes  the  influence  of  "the  extension  of  the  currency  of 
the  world,  caused  by  the  spread  of  commerce,"  but  expresses  the 
opinion  that  "most  writers  have  over-estimated  the  consumption 
of  gold  "  due  to  this  cause. — Investigations  in  Currency  and  Finance, 
p.  69.  J  Laughlin,  Bimetallism  in  the  United  States,  p.  147. 

•Willis,  p.  38. 

301 


THE    PRINCIPLES    OP    MONEY    AND    BANKING 

method  of  arresting  the  loss  of  silver.  This  conference, 
held  during  the  autumn  of  1865,  resulted  in  the  convention 
known  as  the  Latin  Union.  The  parties  to  the  union  were 
France,  Belgium,  Italy,  and  Switzerland.  Greece  soon 
signified  her  adhesion  to  the  convention,  and  the  coinage 
system  of  Spain  after  1868  was  modelled  on  the  French 
system,  although  Spain  did  not  become  a  member  of  the 
Union. 

The  essential  result  of  the  conference  was  to  reduce  the 
metal  in  the  subsidiary  silver  coins  of  the  countries  of  the 
Union  to  a  point  which  would  carry  them  below  their  face 
value  in  gold  and  prevent  their  exportation.  The  forma- 
tion of  the  Latin  Union  was,  in  the  language  of  Shaw,  "a 
measure  of  defense  against  the  action  of  the  bimetallic 
system  in  those  countries  which  had  adopted  the  mone- 
tary system  of  France,  and  lay  exposed  to  all  its  disas- 
trous fluctuations."  The  idea  has  grown  up  among 
careless  observers  that  the  Latin  Union  was  a  convention 
for  the  promotion  of  bimetallism  and  a  common  coinage 
system  among  the  countries  taking  part.  The  fact  was 
substantially  the  opposite.  The  countries  which  took 
part  had  already  adopted  the  French  monetary  system 
and  the  conference  was  called  for  the  purpose  of  guarding 
against  the  difficulties  which  had  developed  under  its 
operation.  The  convention  of  the  Latin  Union  practically 
adopted  gold  as  the  standard  of  the  countries  taking  part. 
The  mints  were  left  open  to  the  free  coinage  of  both 
metals,  but  silver  was  too  much  undervalued  at  the  coin- 
age ratio  to  be  presented  for  coinage.  It  was  not  then 
anticipated  that  this  condition  would  change.  In  order 
to  avert  the  melting  down  of  the  subsidiary  silver,  the 
fineness  of  the  coins  was  reduced  from  nine-tenths  to 
0.835,  and  in  order  to  prevent  excessive  coinage  the  quota 
for  each  country  was  fixed  at  six  francs  ($1.158)  per  head. 

The  conditions  which  attended  the  formation  of  the 

1  History  of  Currency,  p.  120. 
302 


Latin  Union  in  1865  changed  radically  within  the  next 
three  years.  The  production  of  silver  throughout  the 
world  in  proportion  to  gold  greatly  increased,  the  output 
of  gold  slackened,  and  silver  fell  to  a  bullion  value  in  1867 
of  15.57  to  i.  This  made  it  more  profitable  to  present 
silver  to  the  mints  for  coinage  than  gold  and  changed  en- 
tirely the  nature  of  the  problem  confronting  the  countries 
of  the  Union.  Then  came  the  war  with  Germany,  which 
greatly  impaired  the  financial  as  well  as  military  prestige 
of  France,  and  the  adoption  by  Germany  in  1871  of  the 
gold  standard,  followed  in  1872  by  the  monetary  treaty 
between  Norway  and  Sweden  and  Denmark,  establishing 
gold  as  their  monetary  standard.  The  current  of  gold 
which  had  flooded  the  French  mints  dried  up  and  the 
channel  was  refilled  by  silver  from  the  American  mines. 
The  coinage  of  silver  at  the  French  mints,  which  had  been 
practically  nothing  for  a  dozen  years,  rose  to  129,445,268 
francs  in  1868  and  to  156,270,160  francs  in  1873.  The 
mint  of  Belgium  was  besieged  by  the  owners  of  silver 
bullion  and  111,000,000  francs  in  five-franc  pieces  were 
coined  in  1873.  Even  in  Italy,  although  the  country  was 
on  a  paper  basis,  it  was  found  profitable  to  present  silver 
for  coinage  to  the  amount  of  42,000,000  lire. 

Action  was  urgently  required  to  avert  the  flight  of 
French  gold  and  the  descent  of  the  country  to  a  single 
silver  standard.  The  French  mint  took  the  first  step  by 
extending  the  time  within  which  silver  coins  were  deliver- 
ed to  the  depositor  of  the  bullion  from  which  they  were  to 
be  coined.  The  usual  term  of  these  receipts,  which  had 
been  ten  days,  was  extended  from  time  to  time,  until  in 
1874  the  period  reached  nine  months.1  More  drastic 
measures  than  mint  regulations  were  required,  however, 
to  effectively  check  the  flood  of  silver  and  save  France 
from  silver  monometallism.  The  convention  of  the  Latin 
Union  was  called  together  annually  for  the  four  years  be- 

1  Walker,  International  Bimetallism,  p.  172. 
3°3 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

ginning  with  1873,  the  free  coinage  of  five-franc  pieces  was 
suspended,  and  the  maximum  coinage  to  be  allowed  for 
each  country  was  fixed  by  agreement.1  Finally,  in  1878, 
the  free  coinage  of  five-franc  pieces  was  absolutely  sus- 
pended, and  the  issue  of  the  token  coins  of  silver  was 
strictly  limited  by  various  conventions  of  the  states  of 
the  Union.  The  five-franc  pieces  already  coined  remained 
legal  tender  without  limit;  but  gold  was  henceforth  the 
standard.  The  silver  coins  were  kept  at  par  with  the 
standard,  in  spite  of  the  steady  downward  course  of  their 
bullion  value,  by  limitation  of  their  quantity  and  the  fact 
that  they  were  received  at  par  for  public  dues. 

The  experiment  of  bimetallism  in  France  was  thus 
abandoned  after  partial  enforcement  for  seventy  years,  by 
the  deliberate  closure  of  the  mints  to  silver.  In  the 
United  States  also,  at  nearly  the  same  date,  the  free  coin- 
age of  silver  ceased  to  be  lawful,  under  conditions  which 
have  been  the  subject  of  prolonged  and  bitter  con- 
troversy. The  monetary  system  created  by  Hamilton  in 
1792  established  the  ratio  of  15  to  i  between  silver  and 
gold.  The  mint  was  open  to  the  free  coinage  of  both 
metals,  and  it  has  been  contended  by  many  American 
bimetallists  that  the  system  of  1792  established  bimet- 
allism in  the  United  States.  Upon  this  point,  however, 
so  intelligent  and  careful  a  bimetallist  as  Walker  de- 
clares:2 

"A  fair  trial  of  bimetallism,  under  reasonably  favorable 
conditions,  could  not  possibly,  in  the  nature  of  the  case, 
have  been  conducted  here.  The  people  of  this  country, 
throughout  the  period  under  consideration,  habitually 
used  so  small  an  amount  of  either  or  both  of  the  precious 
metals,  in  comparison  with  other  nations,  and  in  com- 
parison with  the  stock  of  these  metals  throughout  the 

1  Absolute  suspension  might  have  been  decreed  but  for  the  desire 
of  Italy,  which  was  on  a  paper  basis,  to  hold  silver  in  her  bank  re- 
serves.— Vide  Willis,  p.  134,  el  seq. 

1  International  Bimetallism,  p.  112. 

3°4 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

world,  that  a  bimetallic  law  here  instituted  could  not  have 
afforded  a  fair  trial  of  bimetallism." 

Walker  further  declares  that  "The  manner  in  which 
bimetallism  was  put  into  operation  here,  by  the  act  of 
1792,  on  the  one  hand,  or  by  that  of  1834,  on  the  other, 
was  such  as  necessarily  to  bring  about  an  early  failure, 
even  though  the  principle  of  bimetallism  were  admitted  to 
be  perfectly  sound."  He  bases  this  statement  partly 
upon  the  selection  by  Hamilton  of  a  ratio  which  was  dif- 
ferent from  that  of  France  and  was  different  from  the 
market  ratio.1  This  ratio,  as  established  by  the  act  of 
April  2,  1792,  was  15  to  i.  Gold  was  undervalued,  with 
the  result  that  little  was  brought  to  the  mints  and  much 
was  exported.  It  had  been  the  intention  of  Hamilton  to 
establish  the  double  standard,  because  he  did  not  believe 
that  the  United  States  were  rich  enough  to  retain  a  gold 
currency.  The  fall  in  the  value  of  silver,  however,  caused 
it  to  be  used  in  paying  debts  and  made  it  practically  from 
1792  to  1834  the  standard  of  monetary  transactions.2 

A  new  policy  was  adopted  in  the  United  States  by  the 
act  of  June  28,  1834.  This  act  changed  the  ratio  between 
gold  and  silver  from  1 5  to  i  to  16  to  i .  This  change  was  ac- 
complished by  lowering  the  weight  of  the  gold  eagle  from 
270  to  258  grains  of  standard  gold.3  The  weight  of  the 
silver  dollar  and  the  amount  of  silver  which  it  contained 
were  left  unchanged,  but  the  dollar  was  practically  dis- 
carded by  giving  it  a  lower  value  at  the  mint  in  relation  to 

1  International  Bimetallism,  p.   114. 

*  Gouge  declared  that  "gold  is,  in  the  spirit  of  our  laws,  a  sub- 
sidiary currency,  its  value  being  computed  in  silver  dollars." — 
Paper  Money  and  Banking  in  the  United  States,  p.  107. 

*  By  the  act  of  1834  the  amount  of  pure  gold  in  the  eagle  was. 
fixed  at  232  grains,  or  a  ratio  almost  exactly  16  to  i;  but  by  the 
act  of  January  13,  1837,  the  amount  of  pure  gold  was  raised  to 
232.2  grains  without  changing  the  gross  weight  of  258  grains,  in 
order  to  make  the  fineness  exactly  nine-tenths.     This  made  the 
ratio  about  15.98  to  i.     Con.  Laughlin,  Bimetallism  in  the  United 
States,  p.  73. 

i.-2o  305 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

gold  than  the  value  of  the  bullion  which  it  contained.  The 
change  of  the  ratio  from  15  to  i  to  1 6  to  i  was  made  with 
the  scarcely  concealed  purpose  of  favoring  the  coinage  of 
gold.  The  market  ratio,  it  was  declared  by  Thomas  H. 
Benton,  was  about  i  to  15!,  and  the  adoption  of  a  higher 
mint  value  for  gold  would  tend  to  bring  it  to  the  mints  and 
keep  away  silver.  There  were  several  political  motives 
for  seeking  this  end.1  Gold  had  been  discovered  in  North 
Carolina;  the  hostility  to  the  Bank  of  the  United  States 
was  cleverly  directed  against  its  paper  issues  and  in  favor 
of  a  gold  currency ;  and  President  Jackson  desired  to  make 
the  public  revenues  of  coin  rather  than  of  bank  paper. 
The  act  of  1834  was  known,  while  pending,  as  "The  Gold 
Bill,"  and  the  ratio  of  16  to  i  was  adopted  for  the  purpose 
of  putting  the  United  States  on  the  single  gold  standard.2 
Its  influence  was  so  powerfully  felt  that  in  the  autumn  of 
1834  gold  began  to  move  towards  the  United  States  in 
such  volume  that  alarm  was  created  for  a  time  in  London 
for  the  reserves  of  the  Bank  of  England. 

It  was  after  the  gold  discoveries  of  1848  that  the  most 
serious  difficulties  began  to  be  encountered  in  the  United 
States  in  retaining  silver  in  circulation.  The  great  in- 
crease in  the  output  of  gold  tended  to  lower  its  value  in 
relation  to  silver  and  made  it  profitable  to  melt  up  the 
silver  coins  and  export  them.  The  operation  of  Gresham's 
Law  under  such  conditions  is  well  set  forth  by  Laughlin:3 

"In  1834  an  ounce  of  gold  bought  about  15.7  ounces  of 

1  "The  ultimate  object  proposed  to  be  accomplished  by  Mr. 
Calhoun  in  this  process  of  'unbanking  the  banks,'  was  to  arrive 
eventually,  and  by  slow  degrees,  at  a  metallic  currency,  and  the 
revival  of  gold.     This  had  been  my  object,  and  so  declared  in  the 
Senate,  from  the  time  of  the  first  opposition  to  the  United  States 
Bank." — Benton,  Thirty  Years'  View,  I.,  p.  435. 

2  This  is  admitted  by  Walker,  who  declares  that  the  influence  of 
the  United  States,  "instead  of  being  used  to  sustain  bimetallism, 
was  practically  exerted  against  it." — International  Bimetallism, 
p.   117. 

1  Bimetallism  in  the  United  States,  p.  76. 

306 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

silver  in  the  bullion  market  (but  sixteen  ounces  in  the 
form  of  coin).  In  the  period  we  are  now  considering, 
however,  since  gold  had  fallen  in  value,  one  ounce  of  gold 
could  buy  15.7  ounces  no  longer,  but  a  less  number,  which 
in  1853  was  about  15.4  ounces.  It  will  be  seen  at  once 
that  this  widened  the  difference  between  the  mint  ratio  of 
i :  1 6  and  the  market  ratio,  and  so  offered  a  greater  profit 
to  the  watchful  money  brokers.  Being  able  to  make 
legal  payment  of  a  debt  either  in  silver  or  gold,  a  man 
having  i  ,600  ounces  of  silver  could  take  only  i  ,540  of  them 
to  the  bullion  market  and  there  buy  100  ounces  of  gold, 
which  would  by  law  be  a  legal  acquittal  of  his  debt.  He 
would  thus  gain  sixty  ounces  by  paying  his  debt  in  gold 
rather  than  in  silver." 

The  gold  standard  was  further  confirmed  and  establish- 
ed by  the  act  of  February  21,  1853,  which  was  passed  to 
arrest  the  disappearance  of  the  subsidiary  silver  coins. 
No  provision  was  made  in  this  act  in  regard  to  the  silver 
dollar,  because  none  had  been  coined  for  many  years; 
it  was  above  the  gold  dollar  in  bullion  value,  and  it  was 
not  then  anticipated  that  silver  bullion  would  ever  again 
be  offered  at  the  mints  on  private  account  for  coinage  into 
dollars.  The  act  of  1853  reduced  the  number  of  grains  of 
pure  silver  in  two  half-dollars  from  371.25  to  345.6  and 
reduced  the  standard  weight  from  412.5  to  384  grains, 
equivalent  to  a  reduction  of  6.91  per  cent.  The  privilege 
of  free  coinage  of  these  coins  on  private  account  was  with- 
drawn, and  their  legal-tender  power  was  limited  to  five 
dollars.  By  these  provisions  the  United  States  definitely 
adopted  the  policy  of  the  single  standard  of  gold,  with  sub- 
sidiary token  coins  of  silver,  the  latter  maintained  at 
parity  with  gold  by  government  control  of  the  output  and 
by  the  limitation  of  their  legal-tender  power. 

From  1853  to  1 86 1 ,  therefore,  the  standard  of  the  United 
States  was  gold,  so  far  as  it  was  not  impaired  by  exces- 
sive issues  of  bank  paper  and  by  the  suspension  of  cash 
payments  in  the  crisis  of  1857.  From  1861  to  1873  the 

307 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

country  was  upon  a  paper  basis,  in  which  the  specie  value 
of  legal-tender  money  was  determined  by  the  quantity  in 
use  and  the  credit  of  the  general  government.  This  paper 
money,  by  its  depreciation  in  gold  value,  first  expelled  the 
standard  coins  of  gold  and  then  dropped  so  low  that  it 
became  profitable  to  melt  up  and  export  the  subsidiary 
coins  of  silver.  The  scarcity  of  small  change  was  supplied 
by  the  issue  of  private  tokens  and  finally  by  the  issue  of 
government  notes  for  denominations  as  low  as  three  cents. 
The  question  of  the  metallic  standard,  therefore,  was  not  a 
practical  one  until  preparations  began  for  the  resumption 
of  specie  payments.  When  it  became  necessary  to  pre- 
pare for  the  coinage  of  metallic  money  for  the  resumption 
of  specie  payments,  it  was  deemed  advisable  by  the  Treas- 
ury Department  to  revise  and  codify  the  coinage  laws. 
In  the  course  of  this  codification  demonetization  of  the 
standard  silver  dollar,  already  accomplished  in  fact  in 
1834  and  confirmed  in  1853,  was  legally  recognized.  The 
act  of  February  12,  1873,  "revising  and  amending  the 
laws  relative  to  the  mint,  assay  offices,  and  coinage  of  the 
United  States,"  provided  for  certain  coins,  among  which 
the  standard  silver  dollar  was  not  included,  and  then  in  a 
subsequent  section  provided: 

"That  no  coins,  either  of  gold,  silver  or  minor  coinage, 
shall  hereafter  be  issued  from  the  mint  other  than  those 
of  the  denominations,  standards  and  weights  herein  set 
forth." 

Such  silver  dollars  as  were  in  existence,  however,  still 
retained  their  full  legal-tender  quality  until  the  enact- 
ment of  the  Revised  Statutes  in  June,  1874,  which  con- 
tained the  following  provision: 

"Section  3586.  The  silver  coins  of  the  United  States 
shall  be  a  legal  tender  at  their  nominal  value  for  any 
amount  not  exceeding  five  dollars  in  any  one  payment." 

It  was  this  legislation  of  1873  an^  1874,  in  its  relation 
to  subsequent  events,  which  led  to  the  charge  that  the 
silver  dollar  had  been  surreptitiously  demonetized  and  that 

308 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

this  action  by  Congress  constituted  the  "Crime  of  1873." 
The  act  of  1873  was  passed,  however,  after  a  report  made 
to  Congress  by  the  secretary  of  the  Treasury  as  early  as 
April  25,  1870,  after  being  reprinted  as  many  as  thirteen 
times  in  the  course  of  its  consideration,  and  after  special 
attention  had  been  called  in  several  reports  to  the  fact 
that  the  silver  dollar  was  discontinued  and  that  it  was  the 
purpose  to  continue  and  confirm  the  gold  standard.1  It 
was  proposed  in  the  original  bill  sent  to  a  committee  by 
Comptroller  Knox,  that  there  should  be  a  silver  dollar  of 
384  grains  standard  silver,  instead  of  the  standard  coin  of 
41 2  £  grains,  but  that  the  new  dollar  should  be  coined  by  the 
government  and  circulate  as  a  token  coin  of  limited  legal- 
tender  power.  This  provision  was  not  retained  in  the  final 
draft  of  the  act. 

It  was  after  the  fall  in  the  gold  value  of  silver  had 
changed  seriously  the  relations  between  the  two  metals 
that  agitation  began  for  the  remonetization  of  the  stand- 
ard silver  dollar  of  412  £  grains  at  the  ratio  of  16  to  i  which 
had  been  fixed  by  the  act  of  1834,  and  for  the  free  coinage 
of  this  dollar  on  private  account  with  full  legal  -  tender 
power.  It  was  then  that  the  advocates  of  this  policy  ex- 
pressed surprise  that  the  silver  dollar  had  been  discon- 
tinued by  the  act  of  1873,  and  tnat  the  more  hot-headed 
among  them  attributed  this  action  to  conspiracy  on  the 
part  of  the  advocates  of  the  gold  standard.  It  was  em- 
phatically declared  by  the  gold  men  that  the  free  coinage 
of  silver  under  existing  conditions  would  drive  gold  from 
circulation,  injure  the  public  credit,  and  result  in  a  dis- 
honest readjustment  of  debts  which  had  been  incurred 

1  It  does  not  fall  within  the  scope  of  this  work  to  analyze  further 
the  evidence  on  this  subject;  it  is  set  forth  by  Laughlin,  Bimetal- 
lism in  the  United  States,  chap,  vii.,  and  by  Watson,  History  of 
American  Coinage,  chap.  viii.  Senator  Sherman  declares  that 
"There  never  was  a  bill  proposed  in  the  Congress  of  the  United 
States  which  was  so  publicly  and  openly  presented  and  agitated." 
^-Recollections  of  Forty  Years,  I.,  p.  467. 

309 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

under  the  gold  standard.  Notwithstanding  these  pro- 
testations, the  economic  condition  of  the  country  and  the 
scarcity  of  money  were  such  that  the  House  of  Repre- 
sentatives, in  the  autumn  of  1877,  passed  a  bill  reported 
by  Representative  Bland,  of  Missouri,  for  opening  the 
mints  to  the  free  coinage  of  the  silver  dollar.  This  bill 
was  amended  in  the  Senate  so  that  the  privilege  of  free 
coinage  on  private  account  was  eliminated,  but  the  secre- 
tary of  the  Treasury  was  authorized  and  directed  to  buy 
not  more  than  $4,000,000  and  not  less  than  $2,000,000 
worth  of  silver  bullion  per  month,  and  to  coin  such  bullion 
into  standard  silver  dollars  of  412  £  grains.  This  measure 
was  known  as  the  Bland-Allison  Act,  because  Senator 
Allison  was  the  author  of  the  modifications  made  in  the 
original  Bland  Act  with  the  purpose  of  preventing  free 
coinage.  In  spite  of  the  veto  of  President  Hayes,  the  bill 
was  passed  by  the  two-thirds  vote  in  each  House  necessary 
to  override  a  veto  and  became  a  law  February  28,  1878. 

The  act  of  1878  did  not  have  the  expected  effect  of 
raising  the  price  of  silver  bullion  or  seriously  staying  its 
fall.  A  new  agitation  for  the  free  coinage  of  silver,  which 
came  to  a  head  in  the  Fifty-first  Congress,  resulted  in  the 
passage  (July  14,  1890),  of  the  so-called  "Sherman  Law." 
Senator  Sherman  was  responsible  for  this  law  in  the  same 
sense  as  Senator  Allison  for  the  act  of  1878,  that  he  pre- 
sented it  as  a  substitute  for  a  bill  for  the  free  coinage  of 
silver.1  The  act  followed  in  part  the  recommendations  of 
Secretary  Windom,  in  his  annual  report  for  1889,  that 
silver  bullion  should  be  purchased  monthly  by  the  Treasury 
and  should  be  paid  for  in  notes  issued  by  the  government. 

'Senator  Sherman  afterwards  declared:  "The  silence  of  the 
President  on  the  matter  gave  rise  to  an  apprehension  that  if  a  free 
coinage  bill  should  pass  both  Houses  he  would  not  feel  at  liberty 
to  veto  it.  Some  action  had  to  be  taken  to  prevent  a  return  to 
free  silver  coinage,  and  the  measure  evolved  was  the  best  obtain- 
able. I  voted  for  it,  but  the  day  it  became  a  law  I  was  ready  to 
repeal  it,  if  repeal  could  be  had  without  substituting  in  its  place 
absolute  free  coinage." — Recollections  of  Forty  Years,  II.,  p.  1070. 

310 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

The  House  of  Representatives  passed  a  bill  conforming  in 
some  degree  to  the  recommendations  of  the  secretary,  but 
providing  that  the  proposed  notes  should  be  redeemable 
in  coin  instead  of  silver  bullion.1  The  Senate  substituted 
a  bill  for  the  free  coinage  of  silver.  In  conference  com- 
mittee a  modified  bill  was  adopted,  requiring  the  Treasury 
to  purchase  four  and  a  half  million  ounces  of  silver  per 
month  and  to  issue  treasury  notes,  which  the  secretary  of 
the  Treasury  was  directed  to  redeem  "in  gold  or  silver  coin 
at  his  discretion." 

The  cumulative  effect  of  the  coinage  under  the  Bland- 
Allison  and  the  Sherman  acts  soon  proved  disastrous.  It 
became  evident  that  the  circulation  was  surcharged  with 
silver  to  an  extent  beyond  the  capacity  of  trade  to  absorb 
it.  The  influence  of  Gresham's  law  began  to  be  clearly 
manifest.  The  constant  tendency  of  the  excess  of  silver 
issues  above  the  needs  of  trade  was  to  deteriorate  the 
average  quality  of  the  currency  by  increasing  the  ratio  of 
the  silver,  all  of  which  remained  at  home,  to  the  gold, 
much  of  which  went  abroad.  Gold  exports  began  in  large 
volume  the  month  the  Sherman  law  was  approved.  The 
fiscal  year  ending  June  30,  1891,  witnessed  net  exports  of 
gold  from  the  United  States  to  the  amount  of  $68,130,087 ; 
1892,  $495,873;  and  1893,  $87,506,463.  The  small  net 
exports  of  1892  were  due  to  the  unusual  movement  of 
American  crops,  which  brought  a  considerable  current  of 
gold  into  the  country  to  offset  that  which  was  lost  under 
the  pressure  of  the  Sherman  law.  There  was  a  remarkable 
coincidence  between  the  issues  of  treasury  notes  under 
this  law,  the  net  exports  of  gold,  and  the  reduction  of  the 

1  The  essential  recommendation  of  Secretary  Windom  on  this 
subject  was  to  "issue  treasury  notes  against  deposits  of  silver 
bullion  at  the  market  price  of  silver  when  deposited,  payable  on 
demand  in  such  quantities  of  silver  bullion  as  will  equal  in  value, 
at  the  date  of  presentation,  the  number  of  dollars  expressed  on  the 
face  of  the  notes  at  the  market  price  of  silver,  or  in  gold,  at  the 
option  of  the  government;  or  in  silver  dollars  at  the  option  of  the 
bolder." — Finance  Report,  1889,  p  Ixxiv. 

3U 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

gold  holdings  of  the  Treasury.  The  treasury  notes  issued 
from  the  date  of  the  passage  of  the  law  up  to  June  30, 
1893,  were  $147,190,227 ;  net  exports  of  gold  for  the  three 
years  ending  June  30,  1893,  were  $156,132,423;  and  the 
net  reduction  of  gold  in  the  Treasury  was  $133,156,991. 

While  the  United  States  thus  appeared  in  the  markets 
of  the  world,  by  the  laws  of  1878  and  1890,  as  greater  pur- 
chasers of  silver  in  a  single  year  than  the  entire  coinage 
of  silver  in  the  country  during  any  previous  period  of  a 
generation,  or  the  entire  imports  of  silver  into  France  in  any 
year  prior  to  1873,  these  laws  failed  to  restore  the  parity  of 
silver  with  gold  at  the  ratio  of  16  to  i,  and  still  less  at  the 
European  ratio  of  1 5  J  to  i .  The  purchases  of  silver  under 
the  act  of  1878  were  291,272,018  ounces,  representing  a 
cost  of  $308,279,260.  This  represented  an  average  price 
per  fine  ounce  of  silver  of  $1.0583  and  gave  an  average 
bullion  value  to  the  silver  dollars  of  81.85  cents. 

The  Sherman  law  produced  temporarily  an  influence 
on  the  price  of  silver.  The  average  monthly  price  at  New 
York  in  January,  1890,  was  $0.9751 ;  the  average  price  in 
June  was  $1.0575,  which  rose  in  July  to  $1.08942;  in 
August  to  $1.16995;  and  m  September  to  $i.i656.1  The 
effect  of  this  enhancement  of  the  price  was  to  draw  silver 
from  every  quarter  of  the  world  to  the  United  States.  The 
silver  pesos  of  Mexico,  the  worn  Spanish  and  local  coins  of 
South  America,  and  the  rupees  of  India  flowed  to  New 
York,  where  they  were  melted  into  bars  and  offered  to  the 
Treasury  as  bullion.  This  appearance  of  old  hoards  in- 
evitably produced  a  reaction  in  the  price  of  silver.  The 
average  price  in  October,  1890,  dropped  to  $1.10315.  From 

1  The  highest  price  reached  was  $1.21  on  September  3d.  Noyes 
accounts  for  a  part  of  the  rise  by  declaring  that  "The  speculators 
promptly  put  their  machinery  in  order,  and  by  way  of  affording 
every  possible  facility  to  a  speculative  craze,  the  New  York  Stock 
Exchange  arranged  for  the  deposit  of  silver  bullion  and  the  issue, 
against  such  deposits,  of  negotiable  certificates  which  could  be 
bought,  sold  and  delivered  on  the  Exchange  like  any  other  secu- 
rity."— Thirty  Years  of  American  Finance,  p.  153. 

312 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

that  time  onward,  with  trifling  fluctuations,  the  course  of 
prices  was  steadily  downward,  until  the  average  London 
price  was  only  $0.988  per  ounce  for  the  calendar  year  1891 
and  $0.87145  for  1892.  Then  came  the  decision  of  the 
British  government  to  close  the  mints  of  British  India  to 
the  free  coinage  of  silver,  and  a  panic  in  the  United  States 
resulting  in  part  from  the  revelation  which  this  incident 
afforded  of  the  weakness  of  silver  as  a  basis  of  circulation. 
The  provision  of  the  act  of  1890  for  the  monthly  purchase 
of  silver  bullion  was  repealed  by  the  act  of  November  i , 
1893,  passed  'at  a  special  session  of  Congress  called  by 
President  Cleveland  for  the  purpose. 

The  total  purchases  of  silver  under  the  act  of  1890  were 
168,674,682.53  fine  ounces,  representing  a  cost  of  $155,- 
931,002.25.  The  average  price  paid  per  fine  ounce  for  the 
entire  amount,  in  spite  of  the  high  prices  of  the  autumn  of 
1890,  was  only  92.44  cents,  representing  an  average  bullion 
value  for  the  silver  dollars  of  71^  cents. 

The  operation  of  these  two  acts  of  Congress  was  a  dis- 
appointment in  every  respect  to  the  advocates  of  bimet- 
allism. They  contended,  by  way  of  explanation,  that  these 
laws  were  less  influential  upon  the  price  of  silver  than 
would  have  been  the  opening  of  the  mints  to  free  coinage 
of  the  metal.  While  this  contention  may  have  had  some 
force,  it  was  evident  that  the  United  States  were  incapable 
of  raising  silver  under  any  circumstances  to  a  parity  with 
gold  at  a  ratio  of  16  to  i,  since  purchases  of  silver  larger 
than  the  aggregate  production  of  the  world  in  any  year 
prior  to  1890  had  done  little  more  than  afford  a  temporary 
parachute  to  the  accelerating  fall  in  the  value  of  the 
metal- 

France  and  the  United  States  thus  afford  in  their  mone- 
tary history  the  nearest  approach  to  the  successful  opera- 
tion of  the  bimetallic  system.  The  fact  that  the  system 
broke  down  in  both  countries  and  had  to  be  abandoned,  in 
order  to  avoid  the  loss  of  gold  and  the  prevalence  of  the 
single  silver  standard,  seems  to  demonstrate  historically 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

that  it  is  not  in  the  power  of  a  single  nation  to  give  rigidity 
of  relationship  by  its  laws  to  money  of  two  different  metals 
when  it  is  optional  with  the  owner  of  bullion  of  either 
metal  to  have  it  converted  into  legal-tender  money.  The 
same  experiment  on  a  smaller  scale  in  other  countries  has 
been  equally  disappointing.  Even  before  the  theory  of 
bimetallism  was  conceived  of  as  a  definite  economic  policy, 
the  attempt  to  float  coins  of  two  metals  with  full  legal- 
tender  power  had  been  defeated  in  a  manner,  often  mys- 
terious to  the  public  authorities,  by  the  instinctive  prompt- 
ings of  self-interest  among  individuals.  Thus,  Sir  Thomas 
Mun  declares  regarding  the  English  legislation  of  Eliza- 
beth:1 

"We  have  seen  by  experience  that  the  late  raising  of 
our  Gold  ten  in  the  hundred,  did  bring  in  great  store 
thereof,  more  than  we  were  accustomed  to  have  in  the 
Kingdom,  the  which  as  I  cannot  deny,  so  do  I  likewise 
affirm,  that  this  Gold  carried  away  all  or  the  most  part  of 
our  Silver  (which  was  not  over-worn  or  too  light),  as  we 
may  easily  perceive  by  the  present  use  of  our  Moneys  in 
their  respective  qualities:  and  the  reason  of  this  change  is, 
because  our  Silver  was  not  raised  in  proportion  with  our 
Gold,  which  still  giveth  advantage  to  the  Merchant  to 
bring  in  the  Kingdom's  yearly  gain  by  trade  in  Gold  rather 
than  in  Silver." 

Governments  themselves  in  those  early  days  acted  from 
the  same  motives,  in  preferring  the  cheaper  to  the  dearer 
metal,  which  acted  upon  the  minds  of  the  merchants  and 
money-changers.  Mints  open  to  the  public  are  a  compar- 
atively modern  phase  of  government  coinage.2  As 
Thorold  Rogers  declares,  the  English  mint  was  looked 
upon  as  a  department  of  the  exchequer.  It  received 
money  in  payment  of  taxes  and  dues,  and  in  coining  what 

1  England's  Treasure  by  Forraign  Trade,  p.  42. 

*  The  English  free-coinage  act  was  passed  in  1666  The  text  is 
given  in  the  Report  of  the  International  Monetary  Conference  of 
1878,  Sen.  Ex.  Doc  No  58,  45th  Congress,  3d  Session,  p  309. 


THE    FAILURE    OF    LOCAL    BIMETALLISM 

it  needed  for  the  expenses  of  the  government,  "it  coined, 
we  cannot  doubt,  that  metal  which  it  could  procure  at  the 
cheapest  rate,  in  preference  to  that  which  cost  more."  * 
Fourteen  times  as  much  gold  was  coined  as  silver  from 
1701  to  1724,  by  reason  of  the  overvaluation  of  gold  by 
the  English  coinage  ratio.  Such  silver  as  remained  in 
circulation  consisted  of  the  worn  pieces  which  lacked  the 
value  as  bullion  belonging  to  the  pieces  of  full  weight. 
Even  Cernuschi,  the  ardent  and  logical  advocate  of 
bimetallism,  admits  that  under  early  conditions  the  "dif- 
ference in  the  cost  of  mintage  gave  certainly  a  preference 
to  gold  against  silver."  He  says: 2 

"When  a  payment  was  to  be  made  by  one  country  to 
another,  it  was  certainly  more  preferable  to  send  gold 
than  to  send  silver,  because,  in  melting  down  the  gold 
in  order  to  obtain  a  new  coin  in  a  foreign  country,  the 
coinage  expenses  were  much  less  than  the  expenses  in 
melting  down  and  recoining  silver.  When  a  country  was 
so  deprived  of  gold,  its  mint  changed  its  ratio  in  favor 
of  gold  in  order  to  induce  the  return  of  gold." 

Nowhere  did  the  two  metals  circulate  long  side  by  side 
where  both  were  freely  coined.  In  many  cases  restriction 
of  the  coinage  of  one  metal  or  the  other  changed  the  rela- 
tions which  they  might  have  had  as  bullion  under  the  policy 
of  free  coinage;  but  wherever  the  actual  bullion  value  of 
a  coinage  was  above  its  exchange  value,  it  tended  to  dis- 
appear from  circulation  under  the  manipulation  of  the 
money-changers  almost  as  quickly  as  under  modern  con- 
ditions of  organized  markets  and  telegraphic  and  cable 
transfers.  Bimetallism,  continuously  and  successively 
operative,  is  not  to  be  found  in  economic  history — ancient, 
mediaeval,  or  modern.  It  will  remain  to  discuss  hereafter 
whether  it  would  be  possible  by  the  concurrent  agreement 
of  many  nations. 

1  The  Industrial  and  Commercial  History  of  England,  p.  325. 
'  Nomisma;  or.  Legal  Tender,  p.  24. 


Ill 

EVOLUTION   OF   THE   GOLD    STANDARD 

A  natural  result  of  the  failure  of  local  bimetallism — Tendency  of 
wealthy  societies  to  employ  the  more  valuable  metal — Effect 
of  the  increase  in  the  supply  of  gold  after  1850 — Early  history  of 
relations  between  gold  and  silver — The  international  monetary 
conference  of  1867 — Movements  in  favor  of  gold  in  France, 
Germany,  Austria,  Russia,  and  other  countries — The  Gold 
Standard  Act  of  1900  in  the  United  States. 

THE  failure  of  all  attempts  thus  far  made  to  keep  gold 
and  silver  in  concurrent  circulation  gradually  led, 
during  the  latter  half  of  the  nineteenth  century,  to  the 
evolution  of  a  monetary  type  which  was  not  distinctly 
recognized,  even  where  it  was  tacitly  adopted,  during  an- 
tiquity and  the  Middle  Ages.  This  type  is  the  single  gold 
standard.  To  the  general  adoption  of  the  single  gold 
standard  two  factors  have  contributed — the  growing  pref- 
erence for  gold  as  the  money  of  commerce  and  the  realiza- 
tion of  the  fact  that  a  sound  standard  should  be  of  a  single 
metal. 

The  law  of  evolution  by  which  the  metals  came  to  be 
used  as  money  has  already  been  set  forth.  Society,  by 
degrees,  through  a  process  of  natural  selection,  has  tended 
to  select  and  use  for  money  the  article  best  adapted  to  the 
purposes  of  general  exchangeability  in  the  community 
where  it  is  used.  It  does  not  necessarily  follow  that  the 
article  selected  has  always,  under  differing  conditions,  been 
the  same.  In  early  times,  after  temporary  forms  of 
currency,  like  cattle  and  skins,  had  been  eliminated,  iron 
was  the  standard  among  peoples  of  small  resources  and 

316 


EVOLUTION    OF    THE    GOLD    STANDARD 

restricted  transactions.  Then  came  copper;  then,  at  a 
later  epoch,  silver;  and  then  gold,  each  fulfilling  the  re- 
quirements of  a  medium  of  exchange  for  general  use 
adapted  to  the  character  of  transactions  and  the  economic 
resources  of  the  time. 

There  has  been  a  strong  tendency  in  progressive  societies 
to  advance  gradually  from  a  cheaper  to  a  more  precious 
article  as  the  material  of  money  and  the  standard  of  ex- 
changes. This  has  been  the  natural  result  of  two  causes 
— the  accumulation  of  a  larger  surplus  fund  of  capital  for 
investment  in  the  medium  of  exchange,  and  the  rise  in  the 
scale  of  wages  and  prices.  While  the  product  of  human 
labor  was  scanty,  there  could  be  but  a  small  margin  of 
saved  capital  above  what  was  necessary  for  daily  wants. 
Hence  there  could  be  but  a  small  fund  of  capital  set  aside 
for  investment  in  the  medium  of  exchange.  For  similar 
reasons,  arising  out  of  the  small  productive  power  of  labor, 
wages — where  the  wage  system  was  in  operation — would 
be  small,  and  the  volume  of  transactions  would  be  limited 
in  a  corresponding  degree  by  the  small  purchasing  power 
of  members  of  the  community. 

It  has  been  by  no  arbitrary  action  of  governments  or  in- 
dividuals that  gold  has  gradually  been  formally  recognized 
as  the  standard,  first  of  Great  Britain,  and  then  of  the 
nations  of  the  Continent  of  Europe  and  of  the  United 
States.  It  is  especially  fitted  for  large  transactions  be- 
cause of  its  great  value  in  small  bulk.  This  made  it  the 
money  of  international  commerce  even  while  silver  was 
largely  used  in  domestic  transactions.  So  strong  is  this 
tendency  to  select  the  most  convenient  instrument  for 
making  exchanges,  that  even  paper  supersedes  gold 
where  it  is  equal  to  gold  in  value,  or  where  by  law  it  is  a 
legal  tender  for  the  amount  of  gold  expressed  on  its  face. 
The  notes  of  the  Bank  of  England  are  generally  accept- 
able on  the  Continent  of  Europe,  because  they  afford  one 
of  the  easiest  means  of  making  remittances  to  London. 
American  legal-tender  paper  and  bank-notes  were  accept- 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

ed  in  much  the  same  way  in  the  Orient  after  American  oc- 
cupation of  the  Philippines,  because  they  offered  a  more 
portable  and  convenient  method  of  remittance  to  New 
York  than  gold  coin  or  bullion. 

An  important  factor  in  promoting  the  adoption  of  the 
gold  standard  was  the  great  increase  in  the  production  of 
both  of  the  precious  metals  in  the  nineteenth  century. 
The  increase  in  the  word's  supply  of  gold  made  it  practi- 
cable for  one  nation  after  another  to  find  in  the  market,  and 
to  acquire  without  too  great  an  economic  sacrifice,  a  stock 
of  gold  adequate  for  the  basis  of  its  monetary  system.  The 
increase  in  the  volume  of  metallic  money,  moreover,  along 
with  other  economic  changes,  tended  to  change  the  rela- 
tion of  money  to  goods  in  a  way  to  make  both  of  the 
precious  metals  less  valuable  than  before,  and  to  bring  the 
smaller  gold  pieces  more  nearly  within  the  range  of  retail 
transactions.  This  point  is  well  set  forth  by  the  Vicomte 
d'Avenel:1 

"The  fall  alone  in  the  purchasing  power  of  the  precious 
metals  has  rendered  silver  inconvenient  and  ill-adapted  to 
a  multitude  of  uses  for  which  it  formerly  sufficed.  The 
same  object  which  one  might  have  obtained  in  1400  or  in 
1500  for  1,000  grams  of  silver,  would  require  to-day  5,000 
or  6,000.  One  could  carry  a  kilogram  in  his  pocket,  or 
five  or  six  kilograms  in  his  valise,  but  he  revolts  at 
carrying  five  or  six  in  his  pocket  and  25  or  30  in  his 
valise." 

The  opening  of  the  mines  of  California  and  Australia, 
about  1850,  so  increased  the  stock  of  gold  within  a  gen- 
eration as  to  make  it  adequate  to  the  needs  of  money  in 
the  principal  commercial  nations  of  the  time.  The  sub- 
sequent discoveries  in  South  Africa,  about  1883,  and  in  the 
Klondike  at  an  even  later  date,  tended  to  maintain  the 
supply  and  to  afford  an  increment  of  increase  which  per- 
mitted countries  less  strong  in  economic  resources,  like 

1  La  Fortune  Privie  &  Trovers  Sept  Sibcles,  p.  64. 
318 


EVOLUTION    OF    THE    GOLD    STANDARD 

Austria,  Russia,  and  Japan,  to  follow  successfully  in  the 
wake  of  other  gold-using  countries. 

Inevitably,  as  one  nation  after  another  adopted  the  gold 
standard,  the  reasons  multiplied  for  its  adoption  by  the 
rest.  This  was  partly,  but  not  solely,  due  to  the  fact  that 
the  adoption  of  the  gold  standard  brought  the  nation 
which  adopted  it  into  relations  of  stable  exchange  with  the 
richer  nations,  and  pre-eminently  with  England.  It  was 
also  because  every  accession  to  the  list  of  gold-standard 
countries  increased  the  stability  of  gold  by  spreading  over 
a  wider  field  possible  fluctuations  in  its  exchange  value 
arising  from  changes  in  the  total  supply  or  in  the  demand 
in  any  one  country.  Every  nation  which  opened  its 
mints  to  the  free  coinage  of  gold,  and  closed  them  to 
silver,  by  so  much  widened  the  market  for  gold  bullion. 
With  every  widening  of  the  market  came  a  greater  as- 
surance of  the  ready  absorption  of  new  supplies  and  of  the 
attenuation  of  the  influence  of  any  given  deficiency  of 
supply.  According  to  the  terse  maxim  of  Taussig,  "The 
wider  the  field  over  which  a  given  medium  of  exchange  is 
used,  the  less  likely  is  it  that  changes  in  its  quantity  will 
affect  its  value."1  In  substantially  all  commercial  na- 
tions there  is  now  a  market  for  gold.  If  abnormal  con- 
ditions reduce  the  stock  of  gold  in  one  nation  and  increase 
the  demand  for  it,  the  deficiency  can  be  supplied  from  an 
area  representing  substantially  the  civilized  world.  The 
large  stock  of  gold  in  use  as  money  throughout  the  world, 
amounting  to  nearly  six  thousand  millions  of  dollars,  af- 
fords a  foundation  upon  which  the  added  increment  of  a 
single  year  can  have  but  a  slight  influence  in  affecting  the 
entire  stock,  and  upon  which  any  new  and  special  demand 
can  have  only  small  effect. 

It  has  been  one  of  the  fundamental  flaws  in  the  argu- 
ment for  keeping  gold  and  silver  at  a  fixed  par  through  the 
method  of  international  bimetallism  that  it  has  failed  to 

'  The  Silver  Situation  in  tlie  United  States,  p.  124. 
319 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

recognize  fully  the  difficulty  of  keeping  one  metal  in  the 
same  degree  of  esteem  as  another  when  it  does  not  possess 
the  same  degree  of  utility  for  the  purposes  of  money. 
Where  silver  has  been  best  adapted  to  the  purpose  of  ex- 
changes, in  an  imperfectly  developed  society,  it  has  been 
eagerly  sought  and  highly  valued.  Thus,  in  India,  silver 
has  always  been  rated  higher  in  proportion  to  gold  than  in 
more  advanced  communities,  and  the  demands  of  India, 
both  for  coinage  and  for  ornament,  are  the  chief  source  of 
demand  which  still  sustains  the  market.  This  tendency 
is  thus  defined  by  Schoenhof :  * 

"  It  may  also  be  of  use  to  call  attention  to  the  fact  that 
the  high  valuation  of  silver,  as  compared  with  gold,  has 
been  usual  with  countries  in  a  backward  state,  and  that, 
reversely,  a  lower  valuation  is  the  sign  of  a  more  advanced 
civilization.  This,  to  a  very  large  extent,  is  owing  to  the 
fact  that,  in  undeveloped  countries,  silver  is  the  chief 
currency,  and,  therefore,  in  constant  demand,  on  account 
of  the  limited  monetary  transactions.  It  is  the  economic 
and  industrial  condition  which  governs  the  demand,  and 
not  the  fiat  of  legislators  and  rulers." 

This  view  seems  to  be  consistent  with  the  fact  that  as 
soon  as  such  advanced  countries  as  France  were  willing 
to  part  with  their  silver,  because  its  place  was  supplied 
by  gold,  the  white  metal  was  eagerly  absorbed  by  those 
countries  to  whose  conditions  it  was  especially  adapted. 
Thus  India  and  other  parts  of  Asia,  which  had  taken  from 
England  by  a  single  route  in  1851  only  £1, 716,100  in  silver, 
took  in  1856  .£12,118,985  and  in  1857  £16, 795, 232.*  While 
by  Newton  and  Cernuschi  such  movements  of  the  precious 
metals  are  attributed  to  the  arbitrary  operation  of 
statute  law,  in  establishing  different  ratios  between  the 
metals,  a  deeper  cause  behind  the  law,  shaping  its  provi- 
sions, seems  to  be  found  in  many  cases  in  the  desire  to 
attract  one  metal  or  the  other,  or  (in  the  absence  of  such  a 

1  A  History  of  Money  and  Prices,  p.  41. 
1  Vide  Chevalier,  La  Monnaie,  p.  51. 
320 


EVOLUTION    OF    THE    GOLD    STANDARD 

deliberately  formed  intent)  to  permit  one  to  supersede  the 
other,  according  to  the  local  preference  for  the  metal  best 
suited  to  local  needs.1 

A  striking  case  of  the  operation  of  this  principle  of 
natural  selection  is  afforded  by  the  relations  between  the 
Arabians  and  Tyrians.  In  Arabia  the  value  of  silver  in 
relation  to  gold  was  much  higher  than  in  Spain,  where  the 
Tyrians  procured  large  amounts  of  silver  from  the  mines. 
The  Tyrians,  accordingly,  conveyed  much  of  the  silver 
they  procured  in  Spain  to  Arabia  and  there  exchanged  it 
for  gold,  to  their  own  great  profit  and  the  increase  in  the 
stock  of  the  metal  which  they  most  highly  prized.2  A 
like  tendency  was  noted  by  Newton  in  1717,  that  "in 
China  and  Japan  one  pound  weight  of  fine  gold  is  worth 
but  nine  or  ten  pounds  weights  of  fine  silver,  and  in  East 
India  it  may  be  worth  twelve,  and  this  low  price  of  gold 
in  proportion  to  silver  carried  away  the  silver  from  all 
Europe."3 

Gold  has  become  the  money  of  highly  civilized  states 
because  it  is  best  adapted  to  their  requirements  for  the 
purpose.  This  was  indicated  with  the  dawn  of  modern 
commerce  after  the  discovery  of  America  by  the  change  in 
the  relative  value  of  the  two  metals.  A  given  weight  of 
gold  which  was  equal  in  value  about  the  year  1500  to  10.75 
corresponding  weights  of  silver  rose  in  relative  value  until 
it  stood  in  the  ratio  of  i  to  11.80  weights  of  silver  at  the 
close  of  the  sixteenth  century,  i  to  14^  in  the  middle  of  the 
next  century,  and  about  i  to  15  at  the  close  of  the  seven- 
teenth century  in  1700.  It  was  noted  by  the  Italian 
Montanari  as  early  as  1683  that  "the  ratio  of  silver  to  gold 

1  Even  Cernuschi  declares,  speaking  to  the  United  States 
Monetary  Commission  in  1877,  "Your  law  of  1834,  raising  the 
value  of  gold  as  against  silver  from  1:15  to  i  :i6,  was  enacted  pre- 
cisely with  the  aim  of  inviting  the  importation  of  gold." — Nomis- 
ma;  or.  Legal  Tender,  p.  24.  'Jacob,  I  ,  p.  79. 

1  Mint  Reports,  "  Select  Tracts  on  English  Monetary  History," 
p.  192. 

I.— ai  331 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

of  12  to  i  has  changed  to  a  ratio  of  14 J  to  i."  This  writer 
believed  that  the  chief  cause  of  the  appreciation  of  gold 
was  to  be  found  in  the  trade  with  the  Levant  by  which 
great  quantities  of  the  precious  metals  were  exported  from 
Europe.  A  part  of  the  change  in  the  relative  value  was 
due  to  the  large  production  of  silver  in  America,  but  the 
underlying  economic  causes  are  summed  up,  after  careful 
investigation,  by  Soetbeer  as  follows:1 

"The  cause  of  the  increased  demand  is  to  be  found 
primarily  in  the  continuous  wars  in  Europe,  which,  as  is 
well  known,  caused  gold  to  be  in  great  request.  Next,  it 
is  to  be  found  in  the  growth  of  international  trade  in  the 
seventeenth  century,  which,  notwithstanding  the  ex- 
tending use  of  bills  of  exchange,  yet  created  the  need  for 
shipments  of  coin.  Obviously  gold,  both  intrinsically  and 
because  of  the  common  prohibition  of  coin  shipments,  was 
a  better  medium  than  silver.  Whatever  may  have  been 
the  decisive  cause,  there  can  be  no  doubt  that  between 
1621  and  1650  a  considerable  and  permanent  change  took 
place  in  the  ratio  of  the  precious  metals  in  all  civilized 
countries.  If  wars  and  the  necessities  of  government 
treasuries  were  at  the  outset  the  chief  causes,  yet  appre- 
ciations brought  about  by  them  could  not  have  been 
permanent  unless  a  further  cause,  the  growing  use  of  gold 
in  international  trade,  had  come  into  operation.  No 
explanation  of  such  an  extraordinary  change  can  be  found 
in  the  conditions  of  the  production  of  gold  and  silver. 
Nor  can  we  believe,  after  repeated  examination,  that  the 
rise  in  the  value  of  gold  is  to  be  ascribed  chiefly  to  mint 
regulations.  On  the  contrary,  these  regulations  are  gen- 
erally based  on  changes  in  the  price  of  gold  that  had  al- 
ready taken  place  in  the  open  market." 

Even  so  strong  a  bimetallist  as  Walker  frankly  admits 
that  in  England,  at  least,  as  early  as  1666,  "Unquestiona- 
bly trade  was  all  the  time  attaining  conditions  which  made 

1  "  Bimetallism  in  Europe,"  Sen.  Ex.  Doc.  No.  34,  soth  Con- 
gress, ist  Session,  p.  in. 

322 


EVOLUTION    OF    THE    GOLD    STANDARD 

a  larger  use  of  gold  convenient  and  desirable ;  unquestion- 
ably, also,  England  was  the  country,  of  all  the  world, 
whose  business  justified  the  largest  use  of  it." ]  In  France, 
after  the  gold  discoveries  of  1850,  the  common-sense  of  the 
business  community  accepted  the  influx  of  gold  and  the 
flight  of  silver  with  a  profounder  grasp  than  closet  econo- 
mists of  the  tendencies  of  the  time.  Such  a  representa- 
tive economist  as  Chevalier,  alarmed  by  the  revolution 
going  on  in  French  coinage,  proposed  that  coinage  of  gold 
should  be  limited  in  order  to  keep  it  from  driving  silver 
from  the  country.  But  the  small  shopkeepers  accepted 
the  new  gold  coins  with  little  hesitation,  many  of  them 
hanging  out  the  notice, "  Gold  received  here  without  loss."2 
A  special  commission  which  investigated  the  subject  in 
1858  reported  that  the  use  of  gold  in  France  had  been  pro- 
ductive of  great  benefits  to  trade,  and  that  if  there  had 
been  an  increased  production  of  gold,  there  had  been,  on 
the  other  hand,  a  correlative  progression  in  the  volume  of 
business.3 

That  the  demand  for  gold  in  the  West  and  for  silver  in 
the  East  gave  to  each  a  marginal  value  according  to  local 
preferences  is  demonstrated  by  other  facts  growing  out  of 
the  great  outpouring  of  gold  from  the  mines  between  1850 
and  1870.  The  premium  on  silver  which  prevailed  for  a 
time  in  Europe  is  attributable  in  some  degree  to  the  fact 
that  England  having  large  payments  to  make  to  Asia,  and 
having  no  stock  of  legal-tender  silver  upon  which  to  draw, 
had  to  procure  the  metal  in  those  countries  where  it  was 
in  use  by  paying  for  it  a  premium  in  gold.  This  demand 
for  Asia  diminished  in  1861,  and  the  premium  on  silver 
disappeared  at  the  very  moment  when  the  stock  of  gold 
was  relatively  greater  and  that  of  silver  relatively  less  than 
at  any  previous  time.4  Even  up  to  1875,  when  the  gold 

1  International  Bimetallism,  p.  78. 

*  Walker,  International  Bimetallism,  p.  125.  s  Willis,  p.  12 

4  Moran  calls  attention  to  the  fact  that  from  1852  to  1859  the 
total  exportation  of  silver  from  France  was  2,505,813,178  francs, 

323 


value  of  silver  had  fallen  more  than  five  per  cent.,  the 
annual  production  of  silver  in  the  world  had  not  over- 
taken the  production  of  gold. 

How  rapidly  the  preference  grew  in  France  for  gold  and 
paper,  and  how  steadily  silver  fell  into  disrepute,  is  in- 
dicated by  the  accumulation  of  silver  in  the  vaults  of  the 
Bank  of  France.  From  1869,  when  the  maximum  silver 
holdings  of  the  bank  were  593,300,000  francs  ($115,000,- 
ooo),  the  silver  rose  in  1880  to  a  maximum  of  1,282,500,- 
ooo  francs  ($248,000,000),  and  has  ever  since  oscillated 
around  this  figure.  There  has  been  no  substantial  in- 
crease in  the  demand  for  the  white  metal  for  circulation, 
in  spite  of  the  share  which  has  fallen  to  France  of  the  great 
increase  in  the  world's  volume  of  money  transactions 
since  1880.  The  proportion  of  silver  five-franc  pieces  to 
other  parts  of  the  currency  steadily  declined,  however,  as 
France  received  her  share  of  the  increasing  gold  stock  of 
the  closing  years  of  the  nineteenth  and  the  opening  years 
of  the  twentieth  century.  Analyses  made  of  the  pay- 
ments into  the  Bank  of  France,  the  large  stock  banks,  and 
the  public  offices  showed  that  the  five-franc  pieces,  from 
making  up  9.93  per  cent,  of  such  payments  in  1885,  fell 
to  5.92  per  cent,  in  1891,  4.52  per  cent,  in,  1897,  and  3.66 
per  cent,  in  1903.  Even  gold  fell  in  proportion  to  paper, 
but  in  a  less  proportion  than  silver.1  As  Noel  declared, 
as  far  back  as  1888:  2 

"  In  virtue  of  the  economic  law  which  tends  to  simplify 
methods  of  payment,  silver  was  at  first  less  sought  and 

and  during  the  same  period  the  exportations  of  silver  from  Eng- 
land and  Mediterranean  ports  for  China  and  the  East  Indies  was 
1,917,500,000  francs,  or  about  76Jper  cent,  of  the  exports  from 
France. — Money,  p.  53. 

1  Bulletin  de  Statistique  (March,  1904),  LV.,  p.  294. 

7  Banques  d'Emission  en  Europe,  I.,  p.  183.  The  maximum 
silver  holdings  of  the  Bank  of  France  in  the  year  1904  were  1,136,- 
000,000  francs  ($220,300,000)  and  the  minimum  holdings  1,097,- 
000,000  francs  ($211,800,000). — Bulletin  de  Statistique  (February, 
19051,  LVII.,  p.  174. 

324 


EVOLUTION    OP   THE    GOLD    STANDARD 

\ 

then  neglected  by  the  public,  until  it  naturally  drifted  ty 
the  private  banks  and  from  them  to  the  Bank  of  France, 
which  serves  them  as  a  reservoir.  Of  the  two  thousand 
five  hundred  millions  of  silver  which  France  possesses, 
nearly  half  is  immobilized  in  a  permanent  manner  in  the 
reserves  of  the  bank,  from  which  it  never  comes  out  unless 
to  immediately  return." 

Even  Antoine,  an  advocate  of  bimetallism,  frankly 
admits  that  "every  attempt  to  lighten  the  silver  reserve 
of  the  bank  and  to  increase  the  number  of  crowns  em- 
ployed by  commerce  and  individuals,  has  invariably  fail- 
ed."1 In  the  United  States  the  proof  that  the  era  of 
silver  has  gone  by  is  afforded  by  the  failure  of  repeated 
efforts  to  increase  the  amount  in  circulation  and  the  ready 
acceptance  of  paper  certificates  for  the  coined  pieces.  The 
circulation  of  standard  silver  dollars  was  $67,547,023  at  the 
close  of  December,  1891,  and  the  highest  point  attained 
during  the  succeeding  ten  years  was  only  $76,182,326  on 
December  31,  1900.  The  circulation  of  silver  certificates, 
on  the  other  hand,  rose  from  $320,817,568  on  December 
31,  1891,  to  $460,462,103  on.  June  i,  1905. 

These  facts  show  the  gradual  emergence  of  gold  as  the 
tool  of  exchange  in  the  advanced  commercial  countries. 
Representing  a  larger  value  in  small  bulk,  it  was  more 
convenient  for  reserves  and  for  large  payments  than  the 
cheaper  metal,  and  more  easily  transferred  from  place  to 
place  and  country  to  country  in  settlement  of  banking 
balances.  The  fact  that  silver  has  ceased  to  be  a  con- 
venient tool  of  exchange  in  advanced  countries  is  indicated 
by  the  propositions  of  bimetallists  themselves  that  paper 
notes  should  be  issued  upon  silver  bullion  in  order  to 
continue  its  use  as  money.  It  is  to  be  said  in  reference  to 
such  projects  that  they  are  an  admission  in  themselves 
that  silver  is  not  in  the  advanced  countries  a  convenient 
medium  of  exchange.  It  is  true  that  paper  certificates  are 

1  Cours  d'Economie  Sociale,  p.  290. 
325 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

issued  also  for  gold,  and  constitute  one  of  the  many  forms 
of  paper  credit  which  economize  the  use  of  money.  But 
gold  is  eagerly  accepted  in  final  settlements,  and  possesses 
a  higher  utility  as  a  compact  and  convenient  medium  of 
exchange  than  silver  in  just  the  ratio  of  its  higher  value 
for  a  given  weight — whether  at  the  legal  ratio  of  sixteen  to 
one,  which  prevails  in  the  United  States,  or  the  commercial 
ratio  of  thirty-five  to  one,  which  has  prevailed  in  recent 
years  in  the  open  market.  In  international  transactions 
the  law  of  legal  tender  contributes  little  to  give  value  to 
coins.  In  that  market  it  is  weight  of  metal,  not  decrees  of 
governments,  which  determines  the  value  of  the  money  ex- 
changed. As  the  process  is  described  by  Lord  Farrer:  * 

"If  a  bill  is  drawn  in  New  York  on  London,  American 
dollars  are  legal  tender  for  the  purchase-money  of  the  bill 
in  New  York,  and  English  sovereigns  are  legal  tender  for 
the  discharge  of  the  bill  in  London.  But  as  there  is  no  in- 
ternational legal  tender  law  fixing  the  number  of  dollars 
which  shall  be  paid  for  a  sovereign,  the  number  of  dollars 
or  of  sovereigns  to  be  paid  for  a  bill  is  settled  by  private 
contract  based  upon  the  number  of  dollars  which  the 
market  will  give  for  a  sovereign." 

The  return  to  silver  as  the  merchandise  from  which 
standard  money  was  to  be  composed  would  be,  for  ad- 
vanced commercial  nations,  a  step  backward,  in  the  same 
direction  as  would  be  the  acceptance  of  copper  or  iron. 
Each  of  these  metals  is  a  marketable  article,  but  only  the 
most  valuable  represents  the  most  efficient  and  economical 
commodity  to  be  interposed  between  the  interchange  of 
other  commodities.  Hence  the  attempt  to  give  to  silver 
bullion,  by  free  coinage,  a  higher  value  by  law  than  it  has 
acquired  in  the  competition  of  the  market  -  place  fights 
against  the  natural  tendencies  of  modern  society  to  choose 
for  any  service  to  be  performed  the  method  or  the  sub- 
stance which  affords  the  maximum  of  results  with  the 

1  Studies  in  Currency,  1898.  p.  40. 
326 


EVOLUTION    OF    THE    GOLD    STANDARD 

minimum  of  effort.  An  inevitable  process  of  natural 
selection  has  made  gold  the  standard  money  of  leading 
commercial  states.  Where  law  has  recognized  this  fact,  it 
has  only  crystallized  the  tendencies  of  economic  society 
and  has  not  often  anticipated  them. 

In  antiquity,  the  metal  which  tended  to  become  the 
standard  followed  the  rule  of  evolution  which  has  been 
above  set  forth — first  iron,  then  copper,  then  silver,  then 
gold.  During  the  early  days  of  Rome,  when  her  chief 
wealth  was  in  the  hardy  spirit  and  ready  swords  of  her 
citizens,  copper  money  served  the  universal  purposes  of 
exchange.  The  very  name  of  the  Latin  word,  cestimare, 
"to  value,"  was  derived  from  as,  the  word  for  copper,  and 
the  treasury  of  the  state  was  known  as  the  ararium.  With 
growth  in  wealth,  in  268  B.C.,  about  the  time  of  the  final 
conquest  of  Samnium,  came  the  coinage  of  silver,  and  this 
was  soon  followed  by  the  introduction  of  gold.  Roman 
gold  coins  were  not  struck  in  considerable  amounts  until 
the  time  of  the  Empire,  but  that  gold  was  rapidly  coming 
into  use  is  shown  by  the  fact  that  it  constituted  more  than 
half  of  the  treasure  held  in  the  cerarium  in  the  first  and 
second  centuries  before  Christ,  and  that  a  law  was  passed 
under  Sulla  imposing  the  same  penalties  on  the  adultera- 
tors of  the  gold  ingots  as  those  imposed  upon  the  coiners  of 
false  silver  money.  The  discovery  of  rich  gold-mines  in 
Noricum,  about  150  B.C.,  changed  the  market  ratio  of  gold 
to  silver  from  about  i  to  17  to  i  to  8.93.  The  coinage 
ratio  fixed  by  Julius  Caesar,  and  continued  by  Augustus, 
was  i  to  11.91.*  This  tended  to  prevent  the  coinage  of 
silver  and  bring  the  new  gold  to  the  mints.  Then,  as  in 
later  times,  the  need  for  the  more  precious  metal  seemed  to 
evoke  it  from  the  earth,  and  both  the  coinage  laws  and  the 
necessities  of  commerce  welcomed  it  into  general  circula- 
tion. Carlile  declares  that  a  phenomenon  of  this  kind 
differs  essentially  from  the  expulsion  of  a  good  money 

1  Lenormant,  La  Monnaie  dans  VAntiquiM,  I.,  p.  166. 
327 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

by  a  bad  under  the  operation  of  Gresham's  law.  He 
argues:1 

"  In  the  latter  case,  industry  and  commerce  are  thrown 
into  confusion,  and  the  reform  of  the  coinage  becomes, 
sooner  or  later,  the  subject  of  an  urgent  popular  demand. 
In  the  former  case,  on  the  contrary,  as  was  found  by  the 
experience  of  both  England  and  of  France,  there  is  noth- 
ing but  general  congratulation  at  the  change.  So  far  as 
it  is  possible  to  judge,  the  same  was  the  case  in  Rome  in 
the  era  of  Augustus.  Gold  had  already  become  the  most 
important  medium  of  wholesale  trade.  Its  new  abun- 
dance made  it  now  also  the  great  medium  of  the  inter- 
nal circulation,  and  relegated  silver  to  the  second  place." 

It  was  only  by  degrees,  however,  that  gold  became  pre- 
dominant. For  a  time  the  effort  seems  to  have  been  made 
to  keep  the  two  metals  together  and  to  change  the  weight 
of  the  coins  of  one  with  that  of  the  other;  but  this  crude 
experiment  in  bimetallism  failed,  and  from  the  time  of 
Nero  (54-68  A.D.)  to  that  of  Septimus  Severus  (193-211) 
the  silver  coins  were  treated  as  tokens,  and  gradually 
reduced  to  a  fineness  of  only  forty  or  fifty  per  cent.3 
Other  reductions  of  the  coinage  followed,  but  the  gold 
aureus  or  solidus  finally  adopted  by  Constantine  in  312 
remained  the  standard  unit  of  gold  until  the  downfall 
of  the  Eastern  Empire  in  1453.* 

With  the  eclipse  of  civilization  and  decline  of  wealth 
during  the  Middle  Ages,  gold  fell  to  a  subsidiary  place, 
and  silver  came  to  be  regarded,  where  there  was  any 
money  in  use,  as  the  standard  money  metal.  But  as  soon 
as  wealth  began  to  accumulate  again  in  the  Italian  and 
Dutch  cities,  gold  money  again  came  into  use.  It  was 
already  the  money  of  international  commerce  to  a  con- 
siderable extent  even  while  it  was  not  the  standard  money 
of  circulation  in  any  country.  The  foreign  trader  could 

1  The  Evolution  of  Modern  Money,  p.  39. 

1  Lenormant,  La  Monnaie  dans  I'Antiquitt,  I.,  p.  184. 

1  Ridgeway,  p.  384. 

328 


"EVOLUTION  OF  THE  GOLD  STANDARD 

make  his  contracts  in  gold,  because  he  was  not  bound  by 
legal-tender  laws  in  dealing  with  merchants  of  other  na- 
tions. Even  at  home,  he  "contracted  out"  of  legal- 
tender  laws  which  debased  the  coin,  and  as  these  debase- 
ments usually  applied  to  silver,  gold  became  more  and 
more  the  money  of  trade.1 

In  England,  the  bad  state  of  the  coinage  in  the  time  of 
King  William  III.  led  to  the  calling  in  of  the  old  and 
battered  silver  and  its  recoinage,  from  1695  to  1699,  into 
bright  new  pieces  of  full  weight.  But  almost  as  soon  as 
the  new  pieces  issued  from  the  mints  they  disappeared, 
and  only  the  old,  battered,  and  diminished  pieces  remained. 
Although  this  phenomenon  puzzled  many  persons  at  the 
time,  its  reason  is  plain.  The  new  silver  was  undervalued 
in  its  ratio  to  gold.  This  made  it  profitable  to  melt  the 
coin  and  export  it.  Gold,  which  was  then  overvalued, 
tended  to  become  the  standard,  while  the  defaced  silver, 
being  considerably  less  in  bullion  value  than  the  new 
pieces,  was  at  substantial  commercial  parity  with  the 
gold,  and  therefore  remained  in  circulation  for  subsidiary 
purposes.  As  no  new  silver  was  brought  to  the  mint  for 
coinage,  the  old  pieces  became  more  and  more  worn,  but 
were  kept  in  circulation  by  the  necessity  for  subsidiary 
pieces  representing  smaller  value  than  the  pieces  of  gold. 
They  thus  conformed  in  fact,  without  any  deliberate  plan, 
to  the  rules  under  which  modern  states  have  issued  their 
subsidiary  coinage;  they  passed  for  their  face  value,  ir- 
respective of  their  bullion  value,  and  their  quantity  could 
not  be  unduly  increased. 

Thus  England  became,  in  the  language  of  Shaw,  "a 
gold  monometallic  country  for  the  greater  part  of  the  eigh- 
teenth century,  and  that  long  before  the  advent  of  any 
theory  of  gold  monometallism."2  Already,  in  1774, 
Parliament  had  passed  an  act  limiting  the  legal-tender 

1  Avenel,  p.  54.  See  also  the  instances  collected  by  Carlile, 
The  Evolution  of  Modern  Money,  pp.  51-76. 

1  Select  Tracts  on  English  Monetary  History,  p.  9. 

329 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

power  of  silver  coins  to  £25,  which  was  followed  in  1799 
by  closing  the  mints  to  the  coinage  of  silver  on  private 
account.1  Adam  Smith,  when  he  wrote  in  1776,  already 
spoke  of  gold  as  holding  up  the  value  of  the  silver  coin,  and 
the  mint  price  of  gold  bullion  was  fixed  at  £3  175.  ioW., 
at  which  it  has  ever  since  remained.  Lord  Liverpool's 
act,  which  established  the  gold  standard  in  1816,  simply 
recognized  by  law  the  condition  existing  before  the  sus- 
pension of  cash  payments  in  1793 — that  gold  was  the 
standard  money  of  English  trade.  England,  in  1816, 
was  pre-eminently  the  leader  among  commercial  nations. 
Other  nations  were  somewhat  slow  to  follow  her  example 
in  adopting  gold  as  their  monetary  standard  while  the  stock 
of  gold  in  the  world  remained  small.  But  when  the  gold 
stock  was  so  increased  as  to  form  a  large  part  of  the  cir- 
culating money  even  in  former  silver-using  countries,  gold 
came,  by  force  of  circumstances,  to  be  the  standard  money 
of  commerce. 

A  monetary  conference  called  by  France  in  1867,  in 
which  nineteen  nations  were  represented,  declared  for 
gold  as  the  standard  of  value,  with  only  one  dissenting 
vote.  Even  the  delegate  of  the  Netherlands,  who  cast  the 
negative  vote,  stated  that  he  would  have  voted  with  the 
majority  if  each  state  had  been  left  to  judge  of  the  time 
for  which  it  should  maintain  the  double  standard.2  The 
preference  for  gold  was  cropping  out  everywhere  in  French 
commercial  life,  but  the  Imperial  government  hesitated, 
and  by  hesitating  condemned  France  to  the  great  influx 
of  silver  which  in  later  years  made  it  so  difficult  for  her  to 
maintain  the  stability  of  her  money.  Up  to  1860  the 
heavy  silver  five-franc  pieces  had  been  growing  scarcer  in 
France,  in  spite  of  the  bimetallic  character  of  the  Latin 
Union.  When  an  inquiry  was  ordered  by  the  govern- 

1  Vide  International  Monetary  Conference  of  1878,  Sen.  Ex. 
Doc.  No.  58,  45th  Congress,  36  Session,  p.  348. 

1  International  Monetary  Conference  of  1878,  p.  832.  Con. 
Russell,  International  Monetary  Conferences,  p.  64. 

330 


EVOLUTION    OF    THE    GOLD    STANDARD 

ment  as  to  the  proportions  of  money  received  by  public 
officers,  many  of  these  officers  accounted  for  the  consider- 
able amount  found  in  five-franc  pieces  by  the  unwillingness 
of  individuals  to  receive  them  in  ordinary  transactions.1 
The  Chambers  of  Commerce  expressed  themselves  in  the 
ratio  of  more  than  three  to  one  in  favor  of  the  gold  stand- 
ard. In  Germany  a  commercial  convention  representing 
119  German  cities  adopted,  in  October,  1868,  a  report  pre- 
pared by  Soetbeer  in  favor  of  a  new  currency  based  on 
the  gold  standard  with  the  decimal  system.2  In  Great 
Britain  a  parliamentary  commission  was  appointed  to 
study  the  proposals  of  France  for  a  uniform  coinage,  but 
in  reply  to  an  inquiry  from  the  French  government  as  to 
its  progress,  the  Chancellor  of  the  Exchequer  declared 
that  it  would  be  impossible  to  hold  out  any  hope  of 
assimilation  till  France  made  up  her  mind  to  have  only 
the  gold  standard.3 

Thus  public  opinion,  and  especially  commercial  opinion, 
was  crystallizing  in  favor  of  gold  before  the  depreciation 
of  silver  had  seriously  begun.  There  was  at  that  time  no 
tangible  reason  why  the  economists  and  bankers  of  Europe 
should  have  preferred  gold  to  silver  except  the  general 
economic  tendency  to  prefer  for  any  operation  of  com- 
merce the  most  efficient  means  of  accomplishing  it.  The 
conference  of  1867  and  the  declarations  of  the  French 
and  German  commercial  bodies  put  into  formal  terms 
the  results  of  this  natural  law  of  economic  efficiency.  The 
French  government,  indeed,  until  the  outbreak  of  the 
war  with  Prussia,  resisted  the  general  movement.  A  com- 
mission of  its  own  appointment,  in  1869,  made  a  report 
declaring  that  the  single  gold  standard  was  more  favorable 
than  the  double  standard  to  monetary  unity,  that  it 
would  be  more  advantageous  in  foreign  commerce,  and 
that  it  was  better  suited  for  providing  an  interior  circula 

1  Willis,  p.  99. 

1  International  Monetary  Conference  of  1878,  p.  727. 

*  Russell,  p.   101. 

331 


THE    PRINCIPLES   OF    MONEY   AND    BANKING 

tion  at  once  stable  and  convenient.1  Although  this  com- 
mission was  thus  clear-cut  in  its  expressions,  and  although 
it  recommended  reducing  the  legal-tender  power  of  the 
silver  five-franc  pieces  to  100  francs  ($19.30),  the  Minister 
of  Finance,  M.  Magne,  named  a  new  commission,  which 
did  not  conclude  its  sittings  until  after  the  declaration  of 
war  in  July  (1870).  This  commission  declared  by  a  large 
majority  in  favor  of  the  principle  of  the  gold  standard.2 
It  declared  also  in  favor  of  suspending  or  limiting  the 
coinage  of  the  silver  five-franc  pieces,  "  as  a  precautionary 
measure,  to  ward  off  the  attacks  directed  against  our  gold 
circulation."  3 

France  was  thus  preparing  to  take  the  lead  among  the 
principal  nations  of  the  Continent  in  the  adoption  of  the 
gold  standard,  when  Germany,  as  the  result  of  the  war  of 
1870,  was  enabled  to  supplant  her  as  a  leader  in  monetary 
matters.  It  was  believed  in  France,  rightly  or  wrongly, 
after  the  war,  that  the  transition  from  the  silver  to  the 
gold  standard  would  involve  burdens  to  the  fiscal  and 
monetary  systems  which  could  not  be  safely  added  to  the 
burden  imposed  by  payment  of  the  war  indemnity.4 
Sweden  and  Norway  had  already  adopted  a  gold  coin  for 
international  trade  in  1830,  and  Portugal  had  adopted  a 
definitive  gold  standard  in  1854.  It  remained  for  Ger- 
many, however,  to  take  the  lead  among  important  na- 
tions in  meeting  the  demand  of  international  commerce 
for  the  extension  of  the  gold  standard.  The  great  con- 
fusion caused  by  her  local  coinages  made  it  one  of  the  first 
cares  of  the  Imperial  government  to  adopt  a  uniform 
currency.  With  the  financial  strength  derived  from  the 
proceeds  of  the  indemnity,  this  policy  became  easy  of 
execution.  That  it  was  the  culmination  of  a  swelling 

1  Bonnet,  p.  33.  *  Arnaun6,  p.  195. 

1  Berlin  Silver  Commission  of  1894, 1.,  p.  45.  A  convention  had 
already  been  signed  on  July  31,  1867,  between  Austria  and  France, 
for  establishing  a  fixed  relation  between  the  franc  and  the  gold 
florin.  4  Vide  Shaw,  The  History  of  Currency,  p.  276. 

332 


EVOLUTION    OF    THE    GOLD    STANDARD 

volume  of  opinion  among  men  of  business  as  well  as 
economists,  is  the  weighty  testimony  of  Professor  Bam- 
berger  in  the  paper  submitted  to  the  Berlin  Silver  Com- 
mission of  I894:1 

"It  is  self-evident  that  such  an  agreement  of  all  Euro- 
pean countries  and  of  the  United  States  of  America  did 
not  arise  from  accident,  but  that  it  distinctly  pointed  out 
the  ways  of  the  future  currency  policy  of  the  whole  civil- 
ized world,  and  whatever  has  since  then  been  done  in  the 
world  has  justified  that  foresight.  A  happy  conjuncture 
merely  permitted  Germany  at  a  favorable  moment  to  be 
the  first  to  enter  on  that  path,  and  to  quickly  overcome 
the  difficulties  which,  in  the  course  of  time,  rendered  the 
development  of  matters  difficult  for  other  states.  Nor  can 
there  be  any  doubt  that,  if  Germany  had  at  that  time  de- 
cided in  favor  of  the  silver  standard  or  the  double  standard, 
the  roles  would  have  been  exchanged,  and  other  states, 
especially  those  of  the  Latin  Monetary  Union,  would  have 
secured  precedence  at  the  expense  of  Germany." 

The  preponderance  of  opinion  in  favor  of  gold  among 
leading  students,  financiers,  and  merchants  of  Germany, 
was  formulated  in  the  law  of  July  9,  1873,  adopting  the 
single  gold  standard,  withdrawing  the  old  silver  thalers 
from  circulation,  and  selling  in  the  open  market  the  silver 
which  was  replaced  by  gold.  In  the  United  States,  the 
mints  were  closed  in  1873  to  the  free  coinage  of  the  stand- 
ard silver  dollar,  but  in  the  United  States  also  the  act  of 
1873  was  but  the  recognition  by  law  of  previous  facts, 
which  had  made  gold  the  standard  from  1834  down  to  the 
suspension  of  specie  payments  in  the  Civil  War,  and  had 
practically  prevented  the  presentation  of  silver  to  the 
mints  for  many  years  except  for  subsidiary  coins.2  With 

1  U.  S.  Sen.  Ex.  Doc.  No.  274,  53d  Congress,  ad  Session,  I.,  p.  46. 

2  The  total  coinage  of  silver  by  the  mints  of  the  United  States 
from  1792  to  1853  was  $79,241,854,  of  which  $2,506,890  was  in 
coins  of  one  dollar;  the  coinage  from  1853  to  February  12,  1873, 
was  $64,571,744,  of  which  $5,524,348  was  in  coins  of  one  dollar; 

333 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  adoption  of  the  gold  standard  in  Austria  in  1892,  in 
Russia  and  Japan  in  1897,  and  the  closing  of  the  mints  of 
the  countries  of  the  Latin  Union  to  the  free  coinage  of 
silver,  gold  became  the  standard  of  the  advanced  com- 
mercial nations.  The  momentum  acquired  by  the  move- 
ment aroused  in  some  quarters  grave  fears  that  the 
world's  stock  of  gold  would  be  inadequate  to  the  demand, 
and  caused  a  reaction  which  gave  weight  for  a  time  to  the 
movement  for  international  bimetallism. 

In  the  United  States,  the  struggle  by  which  the  gold 
standard  was  finally  established  by  law  beyond  cavil  was 
made  especially  acute  by  the  neglect  of  Congress  to  pro- 
vide a  proper  system  for  issuing  credit  in  the  less  develop- 
ed parts  of  the  country,  and  by  blind  gropings  for  a  remedy 
for  the  industrial  depression  of  1893.  After  the  country 
had  declared  unequivocally  for  the  gold  standard  in  the 
presidential  election  of  1896,  a  conference  was  called  by 
the  Board  of  Trade  of  Indianapolis,  on  the  initiative  of 
Mr.  Hugh  H.  Hanna  of  that  city.  This  preliminary  gath- 
ering resulted  iri  two  large  conventions  of  representa- 
tive business  men,  held  in  Indianapolis  in  January,  1897, 
and  in  January,  1898,  which  demanded  the  enactment  of 
laws  by  Congress  for  a  "deliberately  planned  monetary 
system."  It  was  demanded  that  such  a  system  should 
provide  that  the  present  gold  standard  should  be  main- 
tained, and  that  steps  should  be  taken  for  the  ultimate 
retirement  of  government  legal  -  tender  notes.1  When 
Congress  neglected  to  authorize  a  commission  to  frame 
such  a  measure,  a  commission  was  named  by  the  executive 
committee  of  the  convention,  with  ex-Senator  George  F. 
Edmunds,  of  Vermont,  at  its  head,  and  the  Hon.  Charles 

the  coinage  from  February  12,  1873,  to  June  30,  1904,  was  $761,- 
556,846.  of  which  $606,288,250  was  in  coins  of  one  dollar.  These 
figures  include  recoinages. — Report  of  the  Director  of  the  Mint, 
1904,  p.  152. 

1  Report  of  the  Monetary  Commission  of  the  Indianapolis  Con- 
vention, p.  8. 

334 


S.  Fairchild,  ex -secretary  of  the  Treasury,  among  its 
members. 

The  measure  proposed  by  this  commission  was  too  com- 
plete and  far-reaching  to  find  immediate  acceptance.  But 
their  report,  as  Hepburn  declared,  "was  forceful,  lucid, 
and  convincing,  and  had  great  influence  upon  the  public 
mind."  l  It  served  at  least  to  set  up  a  standard  towards 
which  practical  legislation  was  directed,  if  it  could  not 
absolutely  attain.  To  the  patience,  tact,  foresight,  and 
self-sacrificing  public  spirit  of  Mr.  Hanna,  chairman  of 
the  Executive  Committee,  was  largely  due  the  final 
fruition  of  the  movement  in  the  Gold  Standard  Act  of 
March  14,  1900.  This  act  was  the  result  of  meetings  of 
committees  of  the  two  Houses  of  Congress  during  the  long 
recess  of  1899.  With  these  committees  Mr.  Hanna  was  in 
frequent  conference,  as  he  had  been  with  the  regular  com- 
mittees during  the  two  previous  sessions  of  Congress ;  and 
the  committee  on  the  part  of  the  House,  representing  the 
leading  Republicans  of  that  body,  was  appointed  at  his 
suggestion.2 

The  Gold  Standard  Act  made  the  important  declaration 
that  the  gold  dollar  should  be  "the  standard  unit  of  value, 
and  that  all  forms  of  money  issued  or  coined  by  the  United 
States  shall  be  maintained  at  a  parity  of  value  with  this 
standard,  and  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  maintain  such  parity."  The  means  placed 
at  the  command  of  the  secretary  of  the  Treasury  for  the 
purpose  of  keeping  the  silver  coins  and  the  government 
notes  at  par  with  gold  were  not  theoretically  perfect,  but 
they  went  far  beyond  the  authority  conferred  by  previous 

1  The  Contest  for  Sound  Money,  p.  398. 

7  The  "  McCleary  bill,"  reported  at  the  long  session  of  the  Fifty- 
fifth  Congress  by  Representative  McCleary,  of  Minnesota,  em- 
bodied many  of  the  measures  of  the  Monetary  Commission,  but 
was  not  acted  on.  Mr.  Hepburn  declares  that  it  was  the  Spanish 
War  which  "nerved  the  Republican  leaders  to  firm  action  in 
behalf  of  the  gold  standard,  relieved  as  they  were  from  fear  of 
popular  defeat." — Tlte  Contest  for  Sound  Money,  p.  401. 

335 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

law.  A  definite  gold  reserve  fund  of  $150,000,000  was 
established,  to  be  used  exclusively  for  the  redemption  of 
government  legal-tender  notes,  and  this  fund  was  directed 
to  be  kept  unimpaired  by  the  secretary  of  the  Treasury  by 
the  issue,  if  necessary,  of  United  States  gold  bonds. 
Government  notes  redeemed  in  gold  were  to  "be  held  in 
the  reserve  fund  until  exchanged  for  gold." i 

Thus,  by  the  process  of  the  selection  by  commercial 
nations  of  the  fittest  instrument  for  carrying  on  their  ex- 
changes, gold  has  been  formally  established  as  the  mone- 
tary standard  by  the  laws  of  the  leading  states  of  Europe 
and  of  the  United  States.  Legislation  tends  usually  to 
represent  the  crystallized  judgment  of  society.  It  does 
not  often  run  directly  counter  to  that  judgment  or  ad- 
vance far  beyond  it.  As  is  well  declared  by  Herve"- 
Bazin:2 

"It  is  not,  in  short,  by  means  of  authority  that  govern- 
ments erect  a  commodity  into  money.  Authority  simply 
recognizes  the  unanimous  agreement  of  society.  One  who 
should  seek  in  our  time  to  set  up  as  money,  grain,  flour  or 
cattle,  would  certainly  fail  in  his  enterprise." 

In  only  a  less  degree  would  that  government  fail  which 
sought  to  continue  a  baser  metal  as  the  standard  in  a 

1  This  provision  was  important,  because  the  presentation  of  notes 
for  redemption  affords  evidence  of  redundancy  in  the  volume  of  the 
circulation,  and  the  contraction  which  would  have  resulted  from 
the  redemption  of  notes  was  persistently  counteracted  in  1894  and 
1895  by  the  employment  of  the  redeemed  notes  for  public  expen- 
ditures in  covering  deficiencies  in  ordinary  revenue.  It  was  the 
suggestion  of  the  present  writer,  while  the  bill  was  in  a  conference 
committee  of  the  two  Houses,  that  the  provision  for  selling  bonds 
should  limit  the  use  of  the  proceeds  of  the  bonds  to  the  redemption 
or  purchase  of  bonds  "and  shall  not  be  employed  for  the  ordinary 
expenses  of  the  government."  This  was  modified  so  that  the  law 
provided  that  notes  which  were  redeemed  might  be  used  to  pur- 
chase or  redeem  bonds  "  or  for  any  other  lawful  purpose  the  public 
interests  may  require,  except  that  they  shall  not  be  used  to  meet 
deficiencies  in  the  current  revenues."^ — Sec.  2,  Act  of  March  14, 
1900.  J  Traits  Elementaire  d' Economic  Politique,  p.  267. 

336 


EVOLUTION    OF    THE    GOLD    STANDARD 

commercial  society  which  was  prepared  for  a  more  pre- 
cious metal.  Hence,  the  general  adoption  of  gold  as  the 
material  of  money  and  the  standard  in  advanced  com- 
mercial societies  simply  represents  the  crystallized  judg- 
ment of  the  business  community  in  those  societies.  As 
has  already  been  shown,  this  judgment  of  commercial 
society  preceded  instead  of  followed  the  measures  of 
governments. 

In  those  cases  where  there  has  been  hesitation  and 
division  of  opinion  among  competent  persons,  there  has 
been  a  real  division  of  interest.  In  a  country  just  upon 
the  borderland  between  conditions  in  which  gold  is  the 
most  efficient  instrument  of  exchange,  and  those  condi- 
tions which  make  silver  more  convenient,  there  would 
naturally  be  political  divisions,  conflict  of  interest,  and 
hesitation  to  depart  from  old  policies.  Where  the  judg- 
ment of  commercial  society  thus  wavers,  the  fact  indicates 
a  lingering  utility  for  silver,  growing  out  of  low  wages  or 
lack  of  a  sufficient  surplus  of  saved  capital  for  adopting 
a  gold  currency,  or,  perhaps,  out  of  some  peculiar  defect  in 
the  monetary  system  which  makes  it  difficult  or  costly  to 
adopt  gold.  Where  it  is  obvious  that  silver  is  the  pre- 
ferred form  of  money,  conforming  to  local  habits  and  to 
the  existing  scale  of  wages  and  prices,  then  it  becomes 
more  difficult  to  introduce  a  gold  currency  and  the  reasons 
for  its  adoption  are  less  conclusive. 

In  those  countries  which  have  lingered  under  the  realm 
of  the  silver  standard,  adherence  to  this  standard  has  un- 
doubtedly been  determined  to  some  degree  by  economic 
reasons  rather  than  by  chance.  While  much  friction  has 
to  be  overcome  in  making  important  economic  changes, 
and  especially  in  advancing  from  a  lower  to  a  higher  form 
of  currency,  yet  in  the  end  commercial  society  usually 
tends  unerringly  towards  the  adoption  of  the  most 
efficient  means  for  carrying  on  its  exchanges  which  its 
economic  strength  enables  it  to  command.  The  richer 
commercial  countries  have  found  gold  to  be  the  most 
'•-«  337 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

efficient  standard  of  value  and  basis  of  credit,  and  as  other 
countries  advance  successively  to  the  same  rank,  and  the 
supply  of  gold  in  the  world  becomes  adequate  to  their 
needs,  they  also  will  take  their  place  from  time  to  time  in 
the  circle  of  the  gold-standard  nations,  until  gold  becomes 
the  universal  money  of  commerce  or  is  superseded  by 
some  more  perfect  instrument  for  doing  the  world's  money 
work. 


IV 

THE    DISLOCATION  OF   THE    EXCHANGES 

Difficulties  in  trade  between  gold  and  silver  standard  countries 
caused  by  fluctuations  in  the  gold  price  of  silver — Relations  of  the 
annual  production  of  silver  to  the  general  stock — Did  falling  ex- 
change stimulate  exports  from  silver  countries  ? — If  so,  was  such 
a  stimulus  an  economic  gain  ? — Facts  seem  to  demonstrate  the 
contrary  in  India,  Mexico,  and  China — The  demand  for  a  remedy 
for  the  fluctuations  of  exchange. 

THE  benefits  of  a  single  standard  adapted  to  modern 
conditions  were  so  keenly  felt  in  the  advanced  com- 
mercial countries  which  adopted  the  gold  basis  after  1873, 
that  the  inconveniences  which  might  attend  the  step  were 
at  first  disregarded  or  obscured.  The  evils  of  the  double 
standard — the  uncertainty  which  it  introduced  into  con- 
tracts and  the  disturbance  which  it  had  caused  to  the 
monetary  system  in  so  many  countries — had  proved  so 
serious,  and  the  advantages  of  the  single  standard  in  in- 
ternal trade  were  so  great  and  obvious,  that  for  a  brief 
period  it  seemed  as  though  there  would  hardly  be  a  dis- 
cordant note  in  the  general  chorus  of  satisfaction.  It  soon 
appeared,  however,  that  several  evils  threatened  to  result 
from  the  rupture  of  the  comparative  steadiness  of  the 
relationship  between  gold  and  silver  which  had  existed 
prior  to  the  general  adoption  of  the  gold  standard. 

While  the  double  standard  had  failed  to  maintain  exact 
parity  between  gold  and  silver,  it  had  tended  to  keep  the 
metals  much  nearer  together  in  value  than  was  found  to 
be  possible  when  one  of  them  ceased  to  be  widely  used  as 
standard  money.  Silver  was  reduced  to  the  rank  of  a 

339 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

commodity  measured  in  value  by  gold,  and  subject,  in  the 
same  manner  as  any  other  commodity,  to  fluctuations  in 
supply  and  demand.  There  were  two  important  ways  in 
which  this  change  operated  to  make  unsteady  the  gold 
value  of  silver.  The  first  was  by  closing  certain  countries 
against  its  introduction  as  legal -tender  money,  and  there- 
by directing  any  increase  of  supply  entirely  upon  those 
countries  which  remained  on  the  silver  standard ;  the  sec- 
ond was  in  separating  the  value  of  existing  silver  coins,  in 
gold  -  standard  countries,  from  the  value  of  the  bullion 
which  they  contained,  and  thereby  removing  from  the 
market  for  silver  bullion  the  steadying  influence  of  the 
great  stock  of  silver  in  use  as  money. 

It  was  contended,  with  some  force,  by  advocates  of 
the  double  standard,  that  so  long  as  this  standard  pre- 
vailed in  France  and  other  important  commercial  coun- 
tries, the  entire  world  was,  in  a  sense,  under  the  operation 
of  the  double  standard.  As  Helm  puts  it,  somewhat  too 
strongly : 1 

"The  joint  standard  was,  in  fact,  up  to  1873,  the  com- 
mon standard  of  value  throughout  the  civilized  world, 
except  where  the  circulation  consisted  of  inconvertible 
paper  -  money.  In  some  countries  the  legal  -  tender  unit 
was  of  silver,  in  others  of  gold  and  silver,  and  in  others  of 
gold.  Since,  however,  the  relative  values  of  the  two 
metals  were  equalized  by  the  action  of  the  mint  laws  of 
the  Latin  Union,  there  was  no  greater  variation  in  the 
rates  of  exchange  between  any  two  of  the  three  classes  of 
countries  than  those  which  occurred,  or  might  have  oc- 
curred, between  any  two  of  the  same  class." 

While  the  concluding  statement  is  subject  to  some 
qualification,  it  involves  an  important  principle.  Even 
a  country  using  gold  only  could  not  escape  the  levelling 
influence  upon  the  ratio  of  exchange  between  the  two 
metals  due  to  the  fact  that  in  bimetallic  countries  a  market 

1  The  Joint  Standard,  p.  129. 
340 


THE    DISLOCATION    OF   THE    EXCHANGES 

existed  to  which  silver  would  be  attracted  if  its  price  fell, 
while  gold  was  released  for  use  in  the  gold  countries;  and 
that  on  the  other  hand  (as  proved  to  be  the  case  after  the 
gold  discoveries  in  California  and  Australia)  a  market  for 
gold  existed  to  which  that  metal,  in  its  turn,  would  be 
attracted  if  it  fell  below  silver  in  value  at  the  legal  ratio 
of  coinage.  Inevitably,  under  the  operation  of  the  law 
of  supply  and  demand,  wide  markets  for  both  metals,  and 
the  possibility  of  substituting  one  for  the  other  as  money, 
tended  to  keep  the  metals  nearer  together  than  if  such 
markets  were  closed.  Hence  it  would  come  that  if  there 
should  be  a  relatively  decreasing  stock  of  gold,  the  value 
of  gold  in  relation  to  other  things  would  not  rise  so  rapidly 
if  the  bimetallic  system  lingered  in  important  countries 
as  if  all  countries  were  upon  a  gold  basis.  The  demand 
for  money  in  the  bimetallic  countries  would  fall  upon  the 
cheaper  metal,  and  thereby  diminish  the  pressure  upon 
the  dearer.  England  could  not  escape  the  operation  of 
such  an  economic  tendency  in  keeping  down  the  relative 
value  of  gold  when  it  tended  to  rise  above  silver,  and  a 
silver-standard  country,  like  France,  could  not  escape  the 
operation  of  the  same  tendency  in  keeping  up  the  value  of 
silver  by  the  opportunity  afforded  for  its  free  conversion 
at  its  mints  into  coin.  Hence  it  was  natural  that  the  two 
metals  should  remain  more  nearly  of  the  same  value  while 
several  powerful  countries  adhered  to  the  bimetallic 
standard  than  after  they  had  closed  their  mints  to  the 
free  coinage  of  silver  and  employed  the  metal  only  in 
limited  quantities  for  their  subsidiary  coinages. 

Upon  the  market  for  silver  bullion  the  closing  of  many 
mints  to  free  coinage  produced  a  marked  effect.  It  was 
not  merely  that  the  market  for  bullion  was  narrowed,  but 
that  the  old  relations  were  severed  between  the  existing 
stock  of  coin  and  the  new  bullion.  So  long  as  important 
mints  were  open  to  the  free  coinage  of  silver,  the  influence 
of  any  increase  or  decrease  in  the  annual  production  was 
diffused  over  the  whole  existing  monetary  stock  of  the 

34? 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

free-coinage  countries.  A  deficiency  of  silver  bullion  for 
industrial  purposes,  or  for  a  new  coinage,  could  be  supplied 
from  the  stock  of  more  than  $i  ,000,000,000  in  silver  money 
in  use  in  the  world  in  1873.  When  almost  the  entire 
volume  of  existing  silver  money,  on  the  other  hand,  came 
to  be  kept  at  par  by  government  control,  and  its  bullion 
contents  remained  continuously  below  par,  the  silver 
entering  the  market  from  time  to  time  represented  almost 
the  entire  visible  stock  subject  to  market  conditions. 
If  the  new  supply  of  bullion  was  small,  its  price  rose  be- 
cause it  was  not  controlled  by  the  great  reserve  fund  of 
the  metal  in  coin ;  if  the  new  stock  was  large,  its  price  fell 
because  it  found  no  check  in  the  opportunity  to  offer  the 
metal  for  free  coinage  at  the  mints.  One  of  the  great 
merits  of  the  metals  as  money  is  the  fact  that  the  pro- 
duction of  any  one  year  forms  but  a  small  fraction  of  the 
existing  stock.  The  product  of  previous  years  remains  a 
permanent  part  of  the  stock  on  the  market,  because  coin 
can  be  converted  into  plate  and  plate  at  will  into  coin. 
The  cost  of  production,  therefore,  or  the  value  of  the  prod- 
uct of  a  given  year,  is  subject  to  the  powerful  steadying 
force  of  the  whole  stock. 

This  regulating  influence  of  the  existing  stock  ceased  to 
operate  when  silver  was  no  longer  freely  coined.  Every 
day  that  the  metal  was  offered  in  the  London  market  it 
became  the  football  of  speculation,  because  the  supply 
there  offered  was,  in  a  sense,  almost  the  entire  visible 
supply,  instead  of  a  small  fraction  of  it,  as  under  previous 
conditions.  The  stock  of  those  countries  which  remained 
on  the  silver  standard — British  India,  Mexico,  and  China 
—remained  nominally  a  part  of  the  common  stock  in  the 
market,  but  even  this  influence  was  felt  feebly  in  the  minor 
fluctuations  of  the  price  in  London,  because  these  coun- 
tries were  so  largely  under  the  domain  of  custom  rather 
than  competition. 

The  effects  of  this  change  in  the  market  position  of  silver 
were  intensified  by  changes  in  methods  of  production.  After 

342 


THE    DISLOCATION    OF   THE    EXCHANGES 

it  became  unprofitable  to  work  the  poorer  silver-mines  in 
gold  countries,  because  of  the  great  fall  in  the  gold  price 
of  silver,  a  large  amount  of  silver  continued  to  be  mined 
as  a  by-product  of  copper,  lead,  and  zinc.  This  supply, 
coming  continuously  upon  the  market,  it  was  necessary  to 
sell  as  rapidly  as  it  was  produced,  since  the  large  capital 
which  would  be  required  to  hold  it,  and  the  almost  con- 
tinuous decline  in  its  gold  price,  discouraged  any  project 
for  withholding  it  for  more  favorable  market  conditions.1 
The  most  obvious  evil  resulting  from  the  fluctuations  in 
the  gold  price  of  silver  bullion,  which  attracted  the  at- 
tention of  the  commercial  world,  was  "the  dislocation  of 
the  exchanges,"  or  the  rupture  of  par  of  exchange  between 
gold  and  silver  countries.  This  means,  in  less  technical 
language,  that  it  became  no  longer  possible  to  calculate 
with  any  certainty — or  even  within  any  definite  limits, 
however  wide — the  degree  to  which  the  money  of  the 
silver  countries  would  depart  from  its  old  relative  value 
to  the  money  of  the  gold  countries.  This  was  designated 
the  rupture  of  the  par  of  exchange,  because  operations  be- 
tween foreign  countries  are  carried  on  through  the  foreign 
exchanges,  and  where  the  standard  money  is  of  the  same 
metal  the  cost  of  conversion  of  one  currency  into  the  other 
represents  only  the  delay  and  expense  of  shipment.  The 
effect  of  this  rupture  of  the  par  of  exchange  upon  coun- 
tries thus  deprived  of  a  common  monetary  standard  was 
set  forth  by  the  British  Gold  and  Silver  Commission  as 
early  as  1888,  before  the  fluctuations  in  the  gold  price  of 
silver  had  attained  anything  like  the  range  of  later  years. 
They  said:2 

1  "As  it  is  known  that  silver  is  being  shipped  with  great  reg- 
ularity, and  as  the  history  of  the  last  thirty  years  shows  an  almost 
continual  fall  in  the  price  of  silver,  it  has  been  a  somewhat  safe 
speculation  to  sell  '  futures '  at  lower  prices.  This  fact  places  the 
seller  of '  futures '  in  a  position  to  be  interested  in  the  constant  fall  of 
silver  and  to  work  for  it." — Memorandum  of  the  Mexican  Commis- 
sion,in  Report  of  the  Commission  on  International  Exchange,  1903, 
p.  194.  2  Sen.Misc.Doc.  No.  34,  soth Congress,  2d  Session, p.  40. 

343 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

"There  is  no  common  measure  of  value;  the  metal  com- 
posing the  standard  in  one  country  is  little  more  than 
merchandise  in  the  other ;  and  many  of  the  advantages  of 
money  as  a  means  of  facilitating  trade  are  thus  curtailed. 
This  inconvenience  is  reduced  to  a  minimum,  or  disap- 
pears altogether,  if  the  value  of  the  two  metals  is  com- 
paratively stable ;  but  it  is  urged  that  if  to  the  difference  in 
standard  is  added  the  uncertainty  of  variations  in  the 
relative  value  of  the  two  metals,  a  serious  impediment  to 
trade  is  established." 

How  serious  is  the  influence  of  such  conditions  on  trade 
was  thus  stated  by  Walker  in  his  discussion  of  the  subject 
in  i 896 :' 

"Such  fluctuations  in  the  relative  values  of  the  two 
money  metals  continually  involve  international  trade  in 
embarrassment  and  disturbances  of  a  most  serious  charac- 
ter ;  and  often  reduce  it  to  mere  gambling.  Without  some 
tie  which  can  hold  the  two  metals  at  least  near  to  each 
other,  during  the  time  between  the  manufacture  and  sale 
of  commodities  and  the  receipt  of  the  proceeds,  the  pro- 
ducer in  a  gold  country  can  never  tell  for  how  much 
silver  he  must  sell  his  goods  in  order  to  make  himself 
whole  and  perhaps  win  a  profit ;  the  producer  in  a  silver 
country  can  never  tell  for  how  much  gold  he  must  sell  his 
goods  in  order  to  make  himself  whole  or  perhaps  win  a 
profit.  The  range  of  possible  losses  or  possible  gains  from 
this  source  are  such  as  to  be  altogether  out  of  proportion 
to  the  range  of  ordinary  chances  of  industrial  and  com- 
mercial enterprise." 

As  soon  as  the  disturbing  influence  of  the  rupture  of  the 
part  of  exchange  between  the  gold  countries  and  the 
silver  countries  began  to  be  felt,  discussion  began  as  to  its 
ultimate  results.  The  natural  tendency  of  the  new  con- 
ditions was  to  increase  the  command  of  a  given  amount  of 
gold  over  labor  in  a  silver  country.  This  would  not  have 

1  International  Bimetallism,  p.  139. 
344 


THE    DISLOCATION    OF    THE    EXCHANGES 

been  the  case  if  wages  in  silver  countries  had  changed 
automatically  with  the  fall  in  the  value  of  silver,  so  as  to 
remain  constant  in  ratio  to  wages  in  gold  countries.  But 
under  normal  conditions,  even  if  such  adjustments  occur 
ultimately,  neither  wages  nor  prices  conform  at  once,  even 
in  advanced  countries,  to  change  in  the  monetary  standard. 
Still  less  has  this  been  the  case  in  the  silver-using  countries, 
where  the  principles  of  competition  act  much  less  ef- 
ficiently than  in  the  gold  countries.  This  condition  nat- 
urally led  to  the  belief  that  a  falling  standard  would 
permit  slight  reductions  in  gold  prices  sufficient  to  com- 
mand foreign  markets,  and  thus  afford  an  opportunity  to 
the  silver  countries  for  increasing  their  exports,  with  the 
resulting  benefits  which  usually  accompany  expansion  of 
trade. 

There  were  strong  hypothetical  reasons  for  believing 
that  these  tendencies  would  prevail,  if  it  were  true  that 
the  producer  could  obtain  labor  at  the  old  wages  in  silver.1 
If  he  continued  to  sell  at  the  old  gold  price  he  would  find, 
for  instance,  if  silver  declined  ten  per  cent.,  that  an  un- 
earned profit  of  this  amount  over  and  above  his  usual 
profit  was  left  in  his  hands.  If  he  found  that  competitors 
in  gold  countries  were  controlling  the  market,  it  was  in  his 
power  to  cut  under  their  prices  by  throwing  away  a  part 
of  the  profit  due  to  the  decline  in  silver,  while  still  retain- 

1  How  these  conditions  have  operated  in  Mexico  is  thus  set  forth 
by  a  careful  observer:  "The  progressive  lowering  of  wages  as  ex- 
pressed in  terms  of  gold  thus  gives  a  margin  of  profit  so  long  as 
silver  falls  faster  than  the  wage  of  skilled  labor  rises,  a  condition 
which  has  generally  existed  for  a  number  of  years,  because  even  in 
the  factories,  where  competition  for  skilled  hands  makes  the  labor- 
cost  tend  to  rise  as  the  prices  of  the  manufactured  articles  go  up, 
it  is  several  years  after  a  severe  fall  in  silver  has  taken  place  before 
any  perceptible  effect  is  produced  upon  wages.  The  stimulation 
thus  induced  has,  however,  not  been  a  healthy  one,  even  from  the 
standpoint  of  the  industries  in  question,  and  it  has  been  most 
baneful  for  the  rest  of  the  country." — Morrell  W.  Gaines,  "Effects 
of  the  Silver  Standard  in  Mexico,"  in  Yale  Review  (November, 
1903),  XII.,  p.  285. 

345 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

ing  a  large  part  of  it.  Upon  the  belief  that  this  would 
be  the  course  generally  pursued  by  exporters  from  silver 
countries,  and  that  they  would  thereby  greatly  increase 
their  market,  was  based  the  fear  that  in  certain  lines  of 
manufactures  they  would  destroy  competitors  in  the  gold 
countries,  or,  at  least,  impose  upon  them  the  necessity  of 
sacrificing  profits  or  reducing  the  wages  of  labor.  Some 
of  these  consequences  appeared  to  be  suffered  by  certain 
industries  in  Great  Britain  in  their  competition  with  the 
corresponding  industries  in  British  India  and  other  silver- 
using  countries  of  the  East. 

It  was  even  contended  in  some  quarters  that  low  gold 
prices  abroad,  caused  by  the  fall  in  silver,  tended  to  re- 
duce gold  prices  in  gold  countries.  This  might  have  been 
true  if  the  export  trade  of  gold  countries  to  silver  coun- 
tries was  a  large  part  of  their  total  export  trade,  upon  the 
theory  of  equilibrium  in  the  value  of  products  exchanged.1 
The  real  difficulty  in  the  case  of  those  industries  which 
suffered  most  appeared  to  be  due,  however,  to  the  artificial 
stimulus  given  by  the  progressive  fall  in  cost  of  production, 
which  caused  the  creation  of  a  volume  of  products  ex- 
ceeding effective  demand,  and  by  special  tariff  legislation. 
Thus  it  was  declared  by  a  committee  of  the  Manchester 
Chamber  of  Commerce,  in  1888,  that  the  special  duty 
levied  in  British  India  on  English  yarn  "so  assisted  in 
stimulating  the  trade  that  more  mills  were  built  than 
could  profitably  be  employed,  as  shown  by  a  fall  of  nearly 
40  per  cent.,  on  the  average,  in  the  shares  of  nineteen 
principal  mills  in  Bombay  during  the  six  months  ending 
March,  1885  ;  and  at  the  end  of  that  year  35  out  of  52  mills 
paid  no  dividend."  2 

1  In  view  of  the  declining  tendency  of  gold  prices,  it  is  declared 
by  Helm  that  "the  endurance  of  the  English  producer  in  the  con- 
test with  the  Indian  buyer  over  the  question  of  who  is  to  bear  the 
brunt  of  the  fall  in  exchange,  has  generally  proved  less  effective 
than  that  of  the  latter." — The  Joint  Standard,  p.  141. 

1  Quoted  by  Helm,  p.  147. 

346 


THE    DISLOCATION    OF    THE    EXCHANGES 

After  a  generation  of  almost  steady  decline  in  the  gold 
price  of  silver,  however,  a  survey  of  the  influence  upon  the 
silver  countries  of  the  rupture  of  the  par  of  exchange  does 
not  indicate  that  large  benefits  have  been  derived  by  these 
countries  from  their  monetary  policy,  or  that  they  have 
even  derived  from  it  the  benefits  which,  upon  a  priori 
reasoning,  might  have  been  expected.  The  countries 
which  adhered  longest  to  the  silver  standard  after  1873 
were  British  India,  China,  and  Mexico.  British  India,  as 
we  shall  see,  changed  her  system  in  1893,  but  changed  it 
after  her  governors  had  been  convinced,  by  careful  ex- 
amination of  her  economic  condition  and  trade  statistics, 
that  she  had  not  derived  essential  benefits  from  remaining 
on  the  silver  standard. 

There  are  two  propositions,  which  may  be  considered 
separately,  in  examining  the  actual  operation  of  a  de- 
clining monetary  standard :  First,  whether  such  a  stand- 
ard does  or  does  not  stimulate  exports;  second,  whether, 
if  such  a  stimulation  occurs,  it  is  beneficial  to  the  export- 
ing country. 

Upon  the  first  question  the  statistics  fail  to  afford 
evidence  of  a  direct  and  powerful  stimulation  of  exports 
under  the  silver  standard.  Such  increase  in  exports  in 
British  India,  in  China,  and  in  MeJiico,  as  was  shown  by 
the  valuations  in  silver,  failed  to  materialize  in  an  actual 
increase  in  gold  values.  The  commission  which,  in  1893, 
investigated  the  subject  of  introducing  a  change  of  system 
into  India,  made  the  following  observations  on  this  sub- 
ject in  its  report  to  the  British  government:1 

"Although  one  may  be  inclined,  regarding  the  matter 
theoretically,  to  accept  the  proposition  that  the  suggested 
stimulus  would  be  the  result  of  a  falling  exchange,  an 
examination  of  the  statistics  of  exported  produce  does  not 
appear  to  afford  any  substantial  foundation  for  the  view 

1  Report  of  the  Indian  Currency  Committee,  par.  27.  This  view 
was  reaffirmed  by  the  committee  of  1898. — Report  of  the  Com- 
mission on  International  Exchange,  1903,  p.  306, 

347 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

that  in  practice  this  stimulus,  assuming  it  to  have  existed, 
has  had  any  prevailing  effect  on  the  course  of  trade ;  on  the 
contrary,  the  progress  of  the  export  trade  has  been  less 
with  a  rapidly  falling  than  with  a  steady  exchange." 

In  the  case  of  China,  the  average  annual  value  of  the 
exports  rose  from  £19,242,153  in  gold,  upon  the  average 
of  the  ten  years  ending  with  1891,  to  £23,376,360,  upon 
the  average  of  the  ten  years  ending  with  1901.  Measured 
in  gold,  therefore,  this  increase  was  only  twenty-one  per 
cent,  in  ten  years,  or  an  average  of  a  little  more  than  two 
per  cent,  a  year.  Such  increase  of  exports  as  occurred, 
moreover,  was  largely  to  surrounding  silver  countries, 
like  Japan  (under  the  silver  standard  until  1897),  Corea, 
the  Straits,  the  Philippines,  and  Hong-Kong.  The  result, 
in  the  opinion  of  expert  observers,  was  that  it  could  not 
be  claimed  "that  the  decline  in  the  gold  value  of  silver 
had  done  anything  to  stimulate  the  growth  of  China's 
exports  to  gold-using  countries,  while,  on  the  other  hand, 
it  has  not  checked  an  expansion  of  imports  from  these 
gold  countries."  1 

In  the  case  of  Mexico,  also,  the  increase  in  the  exports, 
when  measured  in  gold,  was  small  for  a  country  which 
has  developed  her  natural  resources  to  such  an  extent  as 
has  this  republic  in  recent  years.  The  gold  value  of  the 
exports  from  Mexico  increased  only  from  $63,328,157,  in 
1892,  to  $74,106,200,  in  1902,  representing  an  advance  in 
ten  years  of  18.38  per  cent.,  or  less  than  two  per  cent,  a  year. 

These  figures  of  the  increase  in  export  trade,  measured 
in  the  gold  value  of  silver,  it  may  be  contended  do  not  rep- 
resent the  real  increase  in  the  quantity  of  goods  exported. 
This  is  the  fact,  but  it  involves  the  additional  fact — of 
cardinal  importance  in  this  discussion  —  that  the  silver 
countries  have  been  progressively  giving  up  under  the 
silver  standard  a  larger  and  larger  quantity  of  the  prod- 
ucts of  their  labor  in  exchange  for  the  products  of  the  gold 

1  Views  of  officers  of  the  China  Association,  May,  1903. — Re- 
port of  the  Commission  on  International  Exchange,  1903,  p.  259. 

348 


THE   DISLOCATION  OF  THE  EXCHANGES 

countries.  It  is  this  fact  which  has  impaired  the  benefits 
of  any  increase  of  trade  which  they  might  have  derived 
from  falling  exchange,  and  would  tend,  if  continued  in- 
definitely, to  leave  them  poorer  in  the  end  than  if  their 
trade  had  not  expanded.  In  the  case  of  Mexico,  careful 
comparison  of  the  quantities  and  gold  values  of  some  of 
the  principal  articles  exported  showed  that  six  selected 
articles  exported  from  Mexico  in  1902,  at  a  reported  value 
of  $10,781,090  in  gold,  would  have  been  worth  $16,951,328 
in  gold  if  the  unit  of  weight  had  retained  in  1902  the  same 
value  as  in  I892.1 

In  the  case  of  China  comparison  of  prices  of  goods  ex- 
ported in  1903  with  prices  in  1899  indicated  a  decline  in 
gold  value  of  £3,369,800,  while  the  cost  of  imports  from 
gold  countries  indicated  an  increase  in  gold  value  of 
£1,950,755,  or  a  net  loss  on  both  sides  of  the  account  of 
£s»32°.555-2  The  facts,  instead  of  justifying  adherence 
to  a  silver  standard  for  the  benefit  of  exporters,  seemed  to 
justify  the  pregnant  analysis  made  by  the  Chinese  minister 
to  Russia  in  1903:' 

"A  gold  standard  country  is  like  a  man  who  has  ac- 
cumulated riches  to  buy  grain — if  the  grain  is  cheap  he 
reaps  the  benefit.  A  silver  standard  country  is  like  a 
farmer  who  has  accumulated  his  grain  and  holds  it  for  a 
rise  in  price — if  the  price  goes  down,  he  suffers." 

If  this  fall  in  the  gold  prices  of  exports  were  found,  on 

1  "The  Influence  of  Falling  Exchange  upon  the  Return  Re- 
ceived for  National  Products,"  argument  submitted  to  the  Mone- 
tary Commission  of  the  Republic  of  Mexico,  April  18,  1903. — 
Report  of  the  Commission  on  International  Exchange,  1903,  pp. 

431-439- 

1  These  figures  were  worked  out  by  J.  W.  Jamieson,  British 
commercial  attache  at  Peking,  by  avowedly  employing  the  same 
methods  as  those  of  the  present  writer  in  regard  to  Mexico. — Vide 
Report  of  the  Commission  on  International  Exchange,  1904,  pp. 
206—209. 

3  "  Memorial  to  the  Chinese  Imperial  Government,"  in  Report 
of  the  Commission  on  International  Exchange,  1904,  p.  191. 

349 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

examination,  to  apply  in  a  corresponding  degree  to  the 
exports  of  gold  countries,  it  would  not  affect  the  real  re- 
turn received  in  commodities  by  the  exporting  country. 
This,  however,  has  not  been  the  case.  Upon  this  point  an 
instructive  comparison  was  made  by  a  financial  publica- 
tion of  the  export  prices  of  certain  products  of  the  United 
States  and  the  import  prices  of  certain  leading  tropical 
products.  These  statements  showed  that  the  export  price 
of  products  of  the  United  States  tended  to  rise,  or,  at  any 
rate,  not  to  fall,  while  the  import  prices  of  the  articles 
received  from  tropical  countries  tended  steadily  to  fall. 
The  results  of  the  comparison  were  thus  summed  up : l 

"The  exports  of  cotton,  wheat  and  corn  for  the  fiscal 
year  1902,  which  were  actually  valued  at  $409,275,000, 
would  have  brought  at  the  prices  of  1899  only  $319,232,- 
ooo,  or  $90,000,000  less  than  was  actually  received.  On 
the  other  hand,  the  average  import  price  of  coffee  dropped 
from  14.04  cents  for  the  five  years  ending  with  1897,  to 
6.89  cents  for  the  five  years  ending  with  1902.  The  corre- 
sponding decline  in  sugar  was  from  2.47  cents  to  2.26 
cents,  and  of  tea  from  14.10  cents  to  12.79  cents.  The 
imports  of  these  three  articles  into  the  United  States  for 
1902  were  actually  entered  at  the  gold  value  of  $134,861,- 
500,  while  at  the  prices  of  1897  the  same  quantities  would 
have  been  entered  at  $191,078,600.  The  United  States, 
therefore,  obtained  these  three  important  tropical  prod- 
ucts at  $56,000,000  less  than  it  would  have  obtained  them 
at  the  prices  of  five  years  ago,  while  at  the  same  time  ob- 
taining a  considerably  enhanced  price  for  its  own  prod- 
ucts." 

If  these  figures  could  be  treated  as  representative,  it 
would  appear  that  over  a  very  short  space  of  time  there 
was  a  gain  to  the  United  States,  a  gold  country,  in  its  trade 
with  tropical  countries,  of  about  $146,000,000  in  a  total 
trade  of  $500,000,000.  Confirmation  of  these  conclusions 

1  Wall  Street  Journal,  February  16,  1903. 
35° 


THE    DISLOCATION    OF    THE    EXCHANGES 

is  afforded  by  the  economic  experience  of  the  South  Amer- 
ican countries — Uruguay,  which  is  upon  the  gold  standard, 
having  for  many  years  exports  surpassing  those  of  the 
larger  and  more  populous  countries  of  Argentina  and 
Chile  taken  together  while  those  two  countries  were  upon 
a  silver  or  paper  basis.1  Undoubtedly,  other  influences 
than  the  depressing  effects  of  the  silver  standard  operated 
upon  relative  prices  in  gold  and  silver  countries,  but  the 
conclusions  of  a  committee  which  carefully  investigated 
this  subject  seem  to  be  reasonably  justified,  "that  the 
ability  to  reduce  gold  prices  afforded  by  a  depreciating 
standard,  whether  of  silver  or  paper,  tended  everywhere 
to  impoverish  the  economic  forces  of  the  countries  having 
such  a  standard,  in  their  relations  with  the  countries 
having  a  more  stable  standard."2 

In  Spain  during  the  closing  years  of  the  nineteenth 
century  a  like  demonstration  was  afforded  of  the  futility 
of  falling  exchange,  even  under  a  paper  standard,  to 
stimulate  commerce.  Exports  declined  more  than  fifteen 
per  cent,  from  1899  to  1901,  even  when  measured  in  de- 
preciated paper,  justifying  the  judgment  of  Lacombe,  that 
an  unfavorable  exchange  was  "the  conspicuous  cause  of 
the  impoverishment  of  Spain  and  an  obstacle  almost  in- 
surmountable to  her  rehabilitation  by  the  capital  of  which 
she  stands  so  greatly  in  need."3 

These  conclusions  have  been  the  result  of  very  recent 
investigations,  and  their  influence  was  only  vaguely  rec- 
ognized, if  at  all,  down  to  a  recent  date.  They  illustrate 
the  necessity  that — for  the  benefit  of  the  silver  countries 
as  well  as  the  gold  countries — steps  should  be  taken  to 
restore  the  par  of  exchange  which  was  ruptured  when  the 
advanced  countries  universally  adopted  the  gold  standard. 
In  the  restrictions  imposed  by  the  risks  of  fluctuation  upon 

1  Con.  Fiamingo,  in  Journal  of  Political  Economy  (December, 
1898),  VII..  p.  48. 

1  Report  of  the  Commission  on  International  Exchange,  1903,  p. 
439.  *  Le  Change  Espagnol,  p.  20. 

351 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

the  investment  of  capital  in  the  silver  countries  is  probably 
found  the  explanation  of  the  failure  of  their  foreign  com- 
merce to  respond  as  much  as  expected  to  the  stimulating 
influence  of  falling  exchange.  They  could  not  find  the 
means  for  developing  their  export  trade  while  their  mone- 
tary system  kept  foreign  capital  aloof.  This  was  con- 
spicuously the  case  in  British  India  and  Mexico  during  the 
closing  decade  of  the  nineteenth  century,  in  spite  of  the 
rapidity  with  which  surplus  capital  was  accumulating  in 
the  gold-standard  countries.  The  uncertainties  of  ex- 
change made  it  unprofitable,  if  not  absolutely  hazardous, 
for  the  owner  of  capital  in  a  gold  country  to  invest  it  in  a 
silver  country.1  How  this  condition  restricts  the  trade  of 
the  gold  countries  has  been  thus  set  forth:2 

"The  rich  countries  surrender  their  products  to  the  poor 
countries  and  accept  promises  to  pay  instead  of  exacting 
full  payment  from  the  poor  countries  in  their  products. 
These  transactions  are  carried  on  in  a  manner  convenient 
to  all  through  the  medium  of  the  negotiable  securities  of 
joint  stock  companies.  The  exporter  in  the  rich  country 
who  desires  ready  money  for  his  goods  gets  it  from  the 
domestic  or  foreign  joint  stock  company  operating  in  the 
poor  country.  The  latter  company  sells  its  shares  and 

1  It  was  declared  by  Probyn,  in  1888,  before  the  monetary  reform 
in  British  India:  "There  is  urgent  need  for  the  investment  of 
fresh  capital  in  India.  Railways  are  wanted  for  its  development. 
Its  manufacturing  power  is  capable  of  almost  indefinite  expansion. 
Its  mineral  resources  are  believed  to  be  vast.  Its  internal  trade 
is  open  to  immense  extension.  One  witness  examined  before  the 
Gold  and  Silver  Commission  thinks  'that  from  £15,000,000  to 
£20,000,000  might  be  earned  as  an  annual  dividend  on  money  in 
England  for  investments  in  silver-using  countries,  if  the  money 
could  be  protected  from  the  effects  of  this  uncertainty.'" — Indian 
Coinage  and  Currency,  p.  3. 

*  Arguments  submitted  by  the  American  Commission  on  In- 
ternational Exchange,  1903,  p.  101.  The  statistical  and  political 
aspects  of  this  subject  are  more  fully  discussed  by  the  present 
writer  in  Ttie  United  States  in  the  Orient;  the  Nature  of  the  Economic 
Problem. 

352 


THE    DISLOCATION    OF    THE    EXCHANGES 

bonds  in  the  exporting  country,  and  applies  the  proceeds 
in  money  to  payment  for  what  it  buys  in  machinery,  raw 
materials,  and  the  means  for  maintaining  laborers.  Thus, 
in  effect,  the  rich  country  lends  its  capital  in  the  form  of 
products  to  the  poor  country,  exacting  only  an  annual 
interest,  and  not  the  principal,  in  return.  The  great  re- 
sources of  the  manufacturing  capitalistic  nations  are  thus 
put  at  the  command  of  the  undeveloped  countries,  where 
they  are  capable  of  yielding  the  largest  returns  and  the 
greatest  sum  of  benefits  to  all  concerned  in  the  trans- 
action." 

Already  this  evil  of  the  dislocated  exchanges,  in  its  in- 
fluence on  investments,  was  a  subject  of  discussion  in  the 
Report  of  the  British  Gold  and  Silver  Commission  in  1888, 
when  silver  had  fallen  in  gold  value  from  an  average  of 
59TC  pence,  in  1873,  to  4 2^  pence  in  1888.  The  evil  be- 
came much  more  acute  in  later  years,  especially  after  the 
drop  from  the  average  quotation  of  27-^  pence,  in  1901, 
to  24^  pence  in  1902.  Under  the  conditions  which  then 
prevailed  even  short-term  loans  could  not  be  made  safely 
in  silver  countries  by  capitalists  in  gold  countries.1 

The  growth  of  these  evils  in  the  trade  between  gold- 
standard  and  silver-standard  countries  began  to  attract 
attention  soon  after  the  general  adoption  of  the  gold  stand- 
ard in  Europe  and  the  United  States.  That  they  called 
loudly  for  a  remedy  was  denied  in  few  quarters.  As  to 
the  nature  of  the  remedy,  and  the  degree  of  sacrifice  which 
might  properly  be  made  by  the  gold-standard  countries  in 
order  to  restore  stability  of  exchange  with  the  silver  coun- 

1  "Several  hundred  million  dollars  of  American  and  European 
capital  is  awaiting  investment  in  Mexico  as  soon  as  that  country 
gets  on  a  gold  basis.  Mexican  bankers  could  borrow  money  in 
Paris,  Berlin  or  Brussels  in  large  amounts  and  make  seven,  eight 
or  ten  per  cent,  on  the  investment,  but  they  dare  not  do  it,  because 
if  it  was  loaned  on  short  time  and  they  were  called  on  to  repay  it 
the  fluctuations  in  silver  might  more  than  wipe  out  all  their 
profit." — Report  of  the  Commission  on  International  Exchange, 
1903,  p.  100. 

'-'3  353 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

tries,  there  were  wide  differences  of  opinion.  For  many 
years  there  was  a  persistent,  in  some  respects  well-reasoned 
and  eminently  respectable,  effort  on  the  part  of  economists 
and  statesmen  to  bring  about  the  correction  of  the  evil  by 
a  return  to  the  policy  of  the  double  standard,  under  such  a 
binding  arrangement  among  commercial  nations  as  would 
tend  to  insure  its  successful  operation.  These  efforts 
failed,  because  they  were  contrary  to  the  logic  of  events 
and  were  confronted  by  practical  difficulties  which  proved 
insurmountable. 

It  was  then,  at  the  beginning  of  the  twentieth  century, 
when  fluctuations  of  exchange,  growing  constantly  more 
violent,  threatened  to  paralyze  trade  between  the  gold 
countries  and  the  silver  countries,  that  a  new  method  was 
sought  for  bridging  the  difficulty  and  was  first  applied  in  a 
definite  scientific  manner  by  the  United  States  in  their 
island  dependencies  of  the  Philippines.  Of  both  these 
efforts  to  solve  the  problem — by  international  bimetallism 
and  by  the  gold  exchange  standard — it  will  be  the  mission 
of  the  next  two  chapters  to  speak. 


V 
THE  EFFORT  FOR  INTERNATIONAL  BIMETALLISM 

Importance  of  securing  agreement  among  leading  nations — Dif- 
ficulties in  the  way — Tendency  of  the  cheaper  metal  to  drive 
out  the  dearer — Operation  of  the  principle  of  substitution — 
Too  much  reliance  placed  by  bimetallists  on  statute  law — 
Difficulties  caused  by  differences  in  national  ratios  and  by  the 
decline  in  silver — Efforts  of  international  conferences  prove 
futile  in  1878,  1881,  and  1892 — The  mission  of  Senator  Wolcott 
in  1897. 

TO  those  whose  business  relations  or  economic  in- 
terests brought  home  keenly  the  effects  of  the  rupture 
of  par  of  exchange  between  the  gold  and  silver  countries, 
after  the  fall  in  the  gold  price  of  silver  became  serious,  the 
project  of  bringing  about  bimetallism  by  international 
agreement  strongly  appealed.  Such  a  project  required 
an  agreement  among  leading  commercial  nations  that  their 
mints  should  be  continuously  open  to  the  owners  of  silver 
bullion  for  its  conversion  into  coin  at  a  fixed  ratio  to  gold. 
It  required,  moreover,  that  this  ratio  should,  in  all  the 
nations  entering  into  such  an  agreement,  be  exactly  the 
same,  since,  if  different  ratios  were  adopted,  with  the 
facility  of  communication  and  transportation  now  pre- 
vailing, silver  would  be  offered  at  that  mint  by  whose  ratio 
it  had  the  highest  value  and  withheld  from  those  mints 
by  whose  ratios  it  had  a  lower  value.  Difficulties  present- 
ed themselves  of  a  practical  character  which  prevented 
the  accomplishment  of  any  international  agreement,  and 
eventually  turned  scientific  thought  towards  other  solu- 
tions of  the  problem  of  exchange.  For  nearly  thirty 

355 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

years,  however,  the  literature  of  bimetallism  formed  an 
important  part  of  the  discussion  of  monetary  science,  and 
the  theory  has  been  abandoned  only  reluctantly  by  some 
of  those  who  now  admit  that  the  object  is  practically  un- 
attainable.1 

It  has  been  said  already  that  the  theory  of  interna- 
tional bimetallism  is  one  which  has,  thus  far,  not  been 
fully  tested  in  practice.  Bimetallism  in  a  single  nation, 
under  the  defective  conditions  of  communication  and  of 
monetary  experience  of  a  century  or  more  ago,  although 
it  might  throw  light  on  the  subject,  could  not  afford  such  a 
test  in  a  conclusive  manner.  As  Walker  truly  suggests, 
the  various  nations  of  Europe  "were  trying  to  keep  money 
of  both  metals  in  circulation  within  their  own  borders, 
without  having  any  formed  theory  regarding  the  causes 
which  determine  the  commercial  value  of  one  metal  in 
terms  of  the  other,  or  regarding  the  power  of  government 
to  influence  that  relation."2  If  the  requirements  of  true 
bimetallism  extend  to  the  equal  esteem  by  the  public  of 
the  two  metals  at  their  coinage  ratio,  so  that  at  any  given 
time  one  should  be  as  freely  brought  to  the  mint  as  the 
other,  it  may  be  said  that  bimetallism  has  never  existed 
for  any  appreciable  length  of  time  in  any  country.  Dar- 
win declares:3 

"All  that  is  proved,  in  my  opinion,  is  that  without  in- 
ternational agreements  there  was  in  past  times  a  per- 
petual ebb  and  flow  of  the  precious  metals  between 

1  Thus  Pierson,  the  leading  economist  and  practical  financier 
of  the  Netherlands,  after  defending  the  theory  of  bimetallism, 
declares:  "Unfortunately,  however,  it  must  be  admitted  that, 
after  the  great  fall  which  has  taken  place  in  the  value  of  silver, 
the  whole  controversy  regarding  bimetallism  has  more  theoretical 
than  practical  importance." — Principles  of  Economics,  I.,  p.  581. 

J  International  Bimetallism,  p.  60. 

9  Bimetallism,  p.  137.  Helm,  another  scholarly  advocate  of 
bimetallism,  says  that  the  scheme  for  "a  broad  international 
agreement  is  a  new  thing  in  the  world." — Tlie  Joint  Standard,  p. 
23- 

356 


INTERNATIONAL    BIMETALLISM 

countries  with  different  legal  ratios,  and  that  this  led  to 
constant  changes  in  those  legal  ratios  in  order  to  en- 
deavor to  stop  this  movement.  The  experiment  of 
legalizing  the  same  ratio  in  all  countries  was  never  tried." 

There  is,  therefore,  no  monetary  experience  to  demon- 
strate the  theory  of  international  bimetallism  except 
such  partial  demonstration  as  may  be  derived  from  the 
study  of  conditions  in  which  the  concurrent  circulation 
of  the  two  metals  over  limited  areas  has  broken  down — 
conditions  which  bimetallists  themselves  admit  have  not 
afforded  a  satisfactory  and  adequate  test  of  their  theories. 

The  first  condition  of  true  bimetallism  is  that  the  mints 
shall  be  open  to  the  coinage  of  either  metal  at  the  legal 
ratio  whenever  tendered  by  the  owner.  This  gives  the 
holder  of  bullion  the  power  to  convert  it  into  standard 
coins  without  limit  in  amount.  Hence  the  value  of  the 
coin  expressed  in  money  is  the  same  as  the  value  of  the 
bullion  which  it  contains,  except  for  such  differences  as 
may  be  due  to  charges  for  coinage.  So  long  as  both 
metals  are  thus  converted  freely  into  coin,  a  true  system 
of  bimetallism  exists.  It  is  this  system  which  bimetallists 
believe  would  be  realized  in  practice,  if  the  mints  of  com- 
mercial nations  were  thrown  open  at  an  agreed  ratio  to  the 
free  coinage  of  both  gold  and  silver. 

It  is  a  vital  requirement  of  the  theory  of  bimetallism, 
however,  that  the  coins  of  both  metals  shall  be  legal 
tender  for  debts,  at  the  option  of  the  debtor.  The  law, 
in  other  words,  assumes  not  merely  to  require  the  per- 
formance of  a  specific  contract,  as  when  it  enforces  a 
promise  to  pay  one  hundred  gold  dollars,  but  to  sustain 
the  right  of  the  debtor  to  exercise  an  option  in  the  form 
of  his  payment.  If,  that  is,  a  debtor  has  contracted  to 
pay  one  hundred  dollars,  the  state  declares,  under  a  bime- 
tallic law,  that  he  may  select,  in  making  the  payment,  the 
coins  of  the  metal  which  he  prefers.  Inevitably,  if  there 
is  any  difference  in  their  value,  he  will  prefer  the  cheaper. 
Hence,  if  a  bimetallic  law  fails  to  maintain  a  real  re- 

357 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

lationship  between  two  metals  at  the  ratio  fixed  by  law,  it 
produces  in  effect  the  result  described  by  Fairer:1 

"  In  every  case  one  or  other  of  the  two — the  cheaper  for 
the  time  being — has  become  the  standard  coin  in  use; 
promises  to  pay  have  really  been  promises  to  pay  that 
coin;  and  if  in  the  course  of  events  the  other  metal  has 
become  the  cheaper,  so  as  to  make  it  better  for  debtors 
to  pay  in  coins  of  that  metal,  the  standard  in  use  has  al- 
tered from  one  metal  to  the  other." 

That  this  alternation  between  the  use  of  one  metal  and 
the  other  can  be  cured  by  creating  an  unlimited  demand 
for  both  metals  for  coinage  purposes  is  the  essence  of  the 
theory  of  bimetallists.  They  believe  that  silver  and  gold 
would  be  given  a  fixed  and  continuing  relationship  to  each 
other  if  they  were  accepted  at  this  relationship  at  the 
mints  of  the  leading  commercial  nations  without  limit 
in  amount.  They  contend  that  there  would  be  no  outlet 
for  either  metal  at  any  value  which  departed  from  the 
legal  ratio,  and  that  they  could  not,  therefore,  rise  or  fall 
materially  in  their  relationship  to  each  other.  The  con- 
tention of  the  more  scholarly  of  the  bimetallists  on  this 
point  is  well  summed  up  in  the  Report  of  the  British  Gold 
and  Silver  Commission : 2 

"On  the  assumption  of  an  international  agreement  be- 
tween the  principal  commercial  countries,  the  effects  of  a 
bimetallic  system  so  established  would  be  universal,  and 
there  could  not  be  any  appreciable  difference  between  the 
relative  value  of  the  metals  in  the  open  market  and  their 
legal  ratio.  On  this  hypothesis  the  demand  for  gold  for 
purposes  of  currency  from  the  other  countries  of  the 
world  could  not  be  considerable;  and  consequently  the 
only  purposes  for  which  the  gold  could  be  required  in 
considerable  quantities  would  be  for  industrial  use  or  for 
hoarding ;  and  the  demand  for  these  purposes  when  com- 
pared with  the  annual  production  and  the  existing  stock 

1  Studies  in  Currency,  1898,  p.  44. 

3  Sen.  Misc.  Doc.,  No.  34,  soth  Congress,  ad  Session,  p.  60. 

358 


INTERNATIONAL    BIMETALLISM 

of  metal  would  not  be  sufficient  to  cause  it  to  disappear 
from  circulation." 

There  is  an  element  of  truth  in  the  bimetallic  theory — 
that  the  widening  of  the  market  for  any  product,  whether 
iron  or  wheat,  gold  or  silver,  tends  to  raise  its  value  in 
relation  to  other  things  and  to  narrow  the  range  of 
variations  in  its  value.  Up  to  a  certain  point  the  ex- 
periment of  receiving  silver  at  the  world's  mints  at  a  fixed 
ratio  would  tend  to  give  it  a  definite  value  in  gold ;  but  it 
could  not  permanently  assure  this  value.  It  is,  indeed, 
declared  by  some  of  the  most  thoughtful  advocates  of 
bimetallism  that  their  theory  does  not  demand  absolute 
fixity  in  the  relation  of  value  between  the  two  metals. 
Thus  Lord  Aldenham  declares  of  Giffen,  that  in  setting 
up  such  a  requirement :  * 

"He  has  invented  a  bimetallism  of  his  own,  and  thus 
he  can  show  without  difficulty  that  his  premises  being 
admitted  his  conclusions  would  follow.  This  pseudo- 
bimetallism  is  one  where  gold  and  silver  are  always  in 
constant  and  equal  circulation  in  a  country  at  the  same 
time,  and  where  one  can  always  exchange  gold  and  silver 
one  for  the  other  as  a  right.  No  doubt  he  would  not  rec- 
ognize this  as  his  definition  of  bimetallism,  and  he  does 
not  need  to  be  told  that  it  does  not,  and  never  did, 
exist." 

From  this  point  of  view  the  agio,  or  premium  on  gold 
(which  is  admitted  to  have  existed  from  time  to  time  under 
the  policy  of  bimetallism  in  France),  is  treated  as  of  no 
importance  until  it  reaches  the  point  of  actually  breaking 
down  the  bimetallic  system.2  That  the  action  of  France 
in  postponing  the  delivery  of  coined  silver  after  deposits 
of  bullion,  and  finally  suspending  free  coinage,  caused  the 

1  A  Colloquy  on  Currency,  p.  168. 

1  "The  agio  is  only  concerned  with  export  of  bullion,  coined 
or  uncoined,  whether  in  the  course  of  trade  or  for  the  convenience 
of  travellers.  Internal  commerce  is  in  no  way  concerned  with  it." 
— Aldenham,  p.  63. 

359 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

agio,  instead  of  being  caused  by  it,  is  the  contention  of  the 
bimetallists.  But  this  theory  flies  in  the  face  of  the  fact 
that  there  was  a  growing  preference  for  gold,  and  that  it 
was  this  preference  which  was  depressing  silver  to  the 
point  that  France  could  not,  with  safety,  keep  her  mints 
open  to  both  metals  without  danger  of  seeing  her  gold  and 
silver  coins  part  company  in  value. 

One  of  the  most  attractive  of  the  arguments  in  favor  of 
international  bimetallism  is  based  upon  the  theory  of  sub- 
stitution, by  which  the  preference  for  the  metal  which 
happened  for  the  moment  to  be  cheaper  would  so  shift 
the  volume  of  demand  from  the  dearer  to  the  cheaper  that 
substantial  equilibrium  would  be  maintained.  It  has 
been  seen  that  the  market  for  silver  bullion  was  narrowed 
when  free  coinage  was  suspended  by  the  countries  of  the 
Latin  Union,  and  that  the  result  was  to  greatly  increase 
the  fluctuations  in  the  market-price  of  bullion.  From 
these  facts  has  been  deduced  by  bimetallists  the  theory 
that  the  use  of  both  metals  would  afford  a  more  stable 
standard  of  value  than  the  use  of  a  single  metal,  because 
particular  irregularities  in  production  of  and  demand  for 
one  would  be  compensated  by  the  shifting  of  demand  from 
one  metal  to  the  other.  If  this  substitution  actually 
worked  in  practice  so  that  the  two  metals  remained  in 
concurrent  use,  then  changes  in  prices  of  merchandise,  so 
far  as  they  might  be  influenced  by  the  quantity  of  money, 
would  be  spread  over  a  larger  surface,  and  would  be  less 
violent,  even  if  more  frequent,  than  under  a  single  stand- 
ard of  either  metal.1  The  assumed  law  of  the  actual 

1  The  effect  upon  debtors  and  creditors,  if  this  theory  worked 
out  in  practice,  is  well  put  by  Emile  de  Laveleye:  "  If  a  standard 
of  a  single  metal  is  more  variable  than  one  of  two  metals  combined, 
I  know  the  number  of  grammes  of  the  single  metal  which  I  shall 
receive,  but  I  am  not  as  well  informed  of  the  purchasing  and  debt- 
paying  power  which  they  possess,  which  is  by  far  the  most  im- 
portant. Under  the  regime  of  bimetallic  money,  I  cannot  an- 
ticipate whether  I  shall  be  paid  in  gold  or  silver.  But  if,  whether 
it  be  gold  or  silver,  I  am  equally  able  to  buy  any  merchandise,  and 

360 


INTERNATIONAL    BIMETALLISM 

operation  of  this  theory  is  known  as  the  law  of  the  com- 
pensatory action  of  the  two  metals.  As  set  forth  by 
Darwin,  its  operation,  in  case  gold  coins  rose  in  value 
slightly  above  the  coinage  ratio,  would  be  as  follows:1 

"Gold  coins  would  be  melted  down  and  sold,  and  this 
process  would  reduce  the  price  of  gold  bullion  by  throwing 
more  of  that  metal  on  the  market ;  this  cheapening  process 
would  be  so  rapid  that  an  equilibrium  would  immediately 
be  re-established ;  the  two  metals  would  continue  to  cir- 
culate in  the  currency  at  the  legal  ratio,  and  this  legal 
ratio  would  again  govern  the  bullion  market.  In  fact, 
in  the  opinion  of  bimetallists,  this  process,  or  something 
equivalent  to  it,  would  take  place  so  quickly  that  no  de- 
preciation of  either  metal  could  in  reality  be  observable 
in  the  market." 

Seductive  as  this  theory  is  in  this  form,  it  has  not  work- 
ed out  in  practice  in  a  manner  to  maintain  equilibrium  be- 
tween the  metals.  The  force  of  its  compensatory  action 
was  undoubtedly  felt  in  France  and  other  countries  after 
the  supply  of  gold  had  been  increased  by  the  opening  of 
the  California  mines ;  but  so  far  as  the  law  of  substitution 
acted  under  these  conditions,  it  tended  to  drench  with 
gold  the  countries  whose  mints  were  open  to  the  free  coin- 
age of  both  metals  and  to  draw  away  their  silver  to  coun- 
tries where  silver  was  the  only  legal  tender. 

It  has  been  repeatedly  declared  that  France,  by  ex- 
porting her  silver  and  receiving  gold,  acted  on  this  oc- 
casion, in  the  apt  expression  of  Chevalier,  "as  a  parachute 
for  the  fall  of  gold."  That  France  rendered  some  service 
of  this  sort  may  be  granted,  but  it  is  doubtful  if  she  or 
any  other  nation  would  care  deliberately,  under  modern 
conditions,  to  offer  herself  as  a  vicarious  sacrifice  for  the 

pay  any  debt,  and  if  at  the  same  time  I  am  better  able  to  estimate 
its  future  purchasing  power  than  of  one  or  the  other  metal  alone, 
then  the  basis  of  contracts  will  be  more  certain." — La  Monnaie 
et  le  Bimetallisme  Internationale,  p.  31. 
1  Bimetallism,  p.  30, 

361 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

maintenance  of  the  monetary  system  of  other  countries. 
What  happened  in  France  from  1850  to  1865  was  the  in- 
troduction of  a  gold  currency  in  place  of  a  silver  currency 
— a  change  which  was  in  accord  with  the  modern  evolu- 
tion of  the  most  economical  and  efficient  form  of  money. 
What  would  be  asked  of  France  if  bimetallism  at  the  ratio 
of  15^  to  i  were  to  be  restored,  would  be  that  she  should 
act  as  a  parachute  for  the  fall  of  silver,  or  rather  as  a  lever 
for  raising  the  value  of  silver,  by  parting  with  her  gold  and 
accepting  silver  from  nations  preferring  gold.  One  of  the 
passages  of  the  French  official  inquiry  of  1872,  after  re- 
ferring to  the  great  influx  of  gold  and  outflow  of  silver, 
after  the  California  gold  discoveries,  demanded:1 

"Will  the  opposite  evolution  be  as  simple,  and  will  the 
public  lend  itself  voluntarily  to  the  restoration  of  silver 
and  the  exodus  of  gold?  Assuredly  not,  and  a  change, 
the  reverse  of  that  which  has  occurred  during  the  last 
twenty  years,  would  be  sure  to  excite  the  most  lively 
repugnance." 

The  bimetallic  theory  sought  to  weld  into  a  homo- 
geneous whole  two  commodities  which  were  not  homo- 
geneous. It  has  been  at  just  the  crucial  point  of  establish- 
ing permanency  of  relationship  between  the  two  metals 
that  the  experiment  has  broken  down  when  tried.  The 
reason  was  clearly  defined  by  an  American  writer  more 
than  sixty  years  ago:2 

"Between  gold  and  silver,  therefore,  there  is  not  any 
fixed  proportion  as  to  value,  established  by  nature,  any 
more  than  there  is  a  fixed  proportion  established  by 
nature,  between  lead  and  iron,  or  between  wheat  and 
tobacco.  Nature  does  not  say,  that  one  ounce  of  gold 
shall  always  be  worth  so  many  ounces  of  silver,  any  more 
than  she  says,  that  a  certain  number  of  pounds  of  iron 
shall  always  be  worth  so  many  pounds  of  lead,  or,  that  a 
bushel  of  wheat  shall  always  be  worth  a  fixed  quantity  of 
tobacco." 

1  Willis,  p.  6.  J  Raguet,  p.  219. 

362 


INTERNATIONAL    BIMETALLISM 

This  reveals  the  crux  of  the  difficulty.  Using  one 
article  as  a  substitute  for  another  does  not  make  them 
absolutely  homogeneous.  Because  corn  can  be  used  when 
wheat  is  scarce,  or  copper  may  be  used  in  place  of  iron, 
may  tend  to  steady  the  price  of  one  in  relation  to  that  of 
the  other,  but  it  does  not  make  steadiness  of  relationship 
absolute  and  continuous.  The  great  error  of  the  bime- 
tallic theory  has  been  in  disregarding  the  differences  of 
gold  and  silver  by  seeking  to  fuse  them  into  a  homogeneous 
mass.  The  experiment  would  fail,  just  as  a  similar  ex- 
periment in  regard  to  wheat  and  corn  would  fail,  because 
the  two  articles  are  not  the  same,  the  ratio  of  increase  of 
supply  constantly  varies,  and  the  demand  varies,  in  spite 
of  bimetallic  laws,  according  to  the  silent  but  forceful 
evolution  of  the  preference  in  each  community  for  the 
form  of  money  best  adapted  for  doing  its  work.1 

It  is  undoubtedly  true  that  under  a  bimetallic  system 
the  scarcity  of  one  metal  would  be  compensated  to  some 
extent  by  the  superfluity  of  the  other,  just  as  a  dearth  of 
corn  might  be  supplied  by  the  diversion  of  demand  to  the 
existing  stock  of  wheat ;  but  from  this  law  of  substitution 
it  by  no  means  follows  that  a  rigid  fixity  of  relationship 
can  be  established  between  the  two  cereals  or  the  two 
metals.  As  Kinley  well  points  out,  an  agreement  for 
treating  gold  and  silver  upon  an  equality  at  the  mints 
would  prove  fragile  when  the  advanced  countries  dis- 
covered that  they  were  receiving  into  their  coinage  system 
too  much  of  the  metal  of  low  utility  and  losing  that  of 
higher  utility.2 

1  Sir  Robert  Edgcumbe  insists  that  the  analogy  between  money 
metals  and  commodities  is  a  fallacy,  because  money  is  the  creation 
of  law,  and  "when  gold  and  silver  are  used  for  currency  purposes, 
the  large  amount  so  required  controls  the  value  of  gold  and  silver 
passing  as  commodities." — Popular  Fallacies  Regarding  Bimet- 
allism, p.  21.  But  it  is  precisely  because  gold  is  preferred  to 
silver  as  money  in  advanced  commercial  nations  that  the  effort 
has  failed  to  make  them  by  law  a  homogeneous  mass. 

1  "If  a  country  which  was  poor  and  economically  backward  at 

363 


THE    PRINCIPLES    OF    MONEY   AND    BANKING 

It  is  to  be  feared  that,  under  such  circumstances,  it 
would  be  found  impossible  in  practice  to  keep  the  two 
metals  at  a  fixed  relation  to  each  other.  Gold,  in  depart- 
ing from  the  official  ratio,  might  still  be  used  at  a  new 
ratio  based  upon  its  commercial  value,  just  as  the  English 
guinea,  when  it  tended  to  drive  silver  out  of  circulation, 
was  rated  down  by  act  of  Parliament  to  twenty-one  shil- 
lings. As  the  metals  enter  into  foreign  trade  as  bullion, 
and  only  rarely  as  coins,  and  as  gold  would  probably  con- 
tinue to  be  the  chief  money  of  international  exchanges, 
even  under  a  bimetallic  system,  it  could  easily  be  em- 
ployed in  such  traffic  at  its  real  commercial  ratio  and 
without  reference  to  the  legal  ratio.1 

One  of  the  chief  flaws  in  bimetallic  reasoning  was  in 
attaching  too  much  importance  to  statute  law.  Because 
existing  monetary  systems  depend  upon  law,  such  ex- 
treme definitions  of  money  have  been  given  as  that  of 
Cernuschi,  "  Money  is  a  value  created  by  law  to  be  a  scale 
of  valuation  and  a  valid  tender  for  payments."2  More 
moderate  bimetallists  have  accepted  the  view  which  is 
thus  expressed  by  Horton:8 

"In  every  nation,  arising  from  the  mere  fact  of  its  or- 

the  time  of  the  adoption  of  the  system  became  rich  and  economi- 
cally strong,  its  people  would  need,  and  would  try  to  secure,  the 
metal  of  higher  monetary  utility.  But  the  international  agree- 
ment would  stand  in  its  way,  and,  in  a  measure,  check  its  industrial 
progress.  Such  a  country  would  be  impelled  to  break  away  from 
the  system,  and  adopt  the  metal  best  suited  to  its  changed  condi- 
tion."— Money,  p.  308. 

1 "  Its  use  in  the  payment  of  international  balances  and  for  ship- 
ment between  different  cities  in  the  same  country  would  not  be 
rendered  more  difficult  or  less  convenient  by  the  fact  that  its 
bullion  rather  than  its  tale  value  must  be  considered.  In  fact,  in 
international  payments  its  bullion  value  alone  counts,  no  matter 
what  may  be  the  monetary  system,  and  in  great  financial  in- 
stitutions like  the  Bank  of  England  coins  are  always  received  by 
weight  in  order  to  guard  against  loss  from  abrasion." — Scott,  p. 
308.  *  Nomisma;  or,  Legal  Tender,  p.  7. 

8  International  Monetary  Conference  of  1878,  p.  748. 

36  J 


INTERNATIONAL    BIMETALLISM 

ganized  existence,  there  is  an  universal  and  persistent 
need  to  employ  something  not  merely  as  a  medium  of  ex- 
change, but  as  the  legal  instrument  of  valuation  and 
legal  means  of  payment,  as  lawful  money  and  legal  tender. 
It  is  legislation  which  directs  this  universal  and  persistent 
force  upon  this  or  upon  that  commodity,  and  in  mar- 
shaling the  force  of  human  self-interest  upon  its  side  it 
provides  effective  means  for  the  execution  of  its  edicts. 
It  thus  affects  the  demand  for  the  commodity  selected." 

That  the  demand  for  one  metal  or  the  other  can  be  thus 
affected  by  legislation  is  hardly  capable  of  denial ;  that  it 
can  be  absolutely  controlled  is  more  disputable.  The 
defect  of  the  bimetallic  project  was  that  it  attempted  to  do 
too  much  through  a  system  of  machinery  which  was  in- 
adequate for  the  purpose,  and  attempted  to  do  this,  more- 
over, in  opposition  to  commercial  tendencies  instead  of 
following  such  tendencies.  Statute  law  may  do  much;  it 
cannot  do  all.  In  self-governing  states  and  on  most  sub- 
jects statutes  are  but  the  consecration  in  concrete  form 
of  conclusions  long  since  reached  by  public  opinion.  That 
intelligent  public  opinion  was  veering  steadily  more  and 
more  towards  gold  as  the  standard  money  metal  has  been 
already  shown.  That  this  tendency  created  difficulties 
in  the  relations  between  the  gold  countries  and  those  still 
lingering  upon  the  silver  basis  has  also  been  seen. 

The  attempt  to  cure  the  evil  by  opening  the  mints  of  the 
advanced  nations  to  free  coinage  of  silver  was  an  effort  to 
create  by  force  of  law  an  outlet  which  had  been  closed  by 
the  preference  of  commerce.  To  create  an  artificial  and 
unlimited  market  of  this  sort  would  have  imposed  a  strain 
upon  the  law-making  power  under  which  it  would  almost 
certainly  have  broken  down.  We  shall  see  hereafter,  in 
discussing  the  gold-exchange  standard,  that  dealing  with 
the  subject  from  another  side — that  of  adapting  the 
supply  of  silver  coins  to  the  commercial  demand  for  them 
— obviated  most,  if  not  all,  of  the  evils  for  which  interna- 
tional bimetallism  was  long  considered  the  sovereign  and 

365 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

sole  remedy.  The  attempt  to  produce  absolute  rigidity 
in  relationship  between  the  two  metals,  while  no  control 
was  exercised  over  the  supply  of  either,  was  opposed  to 
the  principle  so  well  denned  by  Chevalier:1 

"The  value  of  gold  and  that  of  silver  depend,  in  fact,  to 
a  large,  extent  upon  circumstances  peculiar  to  each  of 
them,  they  being  identical  in  this  respect  with  iron  or 
copper,  bread  or  meat.  It  would,  doubtless,  be  an  ex- 
aggeration to  say  that  they  are  absolutely  independent  of 
each  other ;  for  whenever  two  substances  have  a  common 
use,  the  value  of  one  exercises  a  certain  influence  upon 
that  of  the  other;  but  between  gold  and  silver  this  relation 
is  not  closer  than  that  between  corn  and  wine,  or  between 
bread  and  meat." 

Aside  from  doubts  as  to  the  theoretical  operation  of  a 
system  of  international  bimetallism,  two  practical  ob- 
stacles of  a  serious  character  always  presented  themselves 
to  prevent  a  preliminary  agreement.  The  first  was  the 
question  of  the  ratio  to  be  adopted  between  gold  and 
silver;  the  second  was  the  doubt  whether  the  contracting 
parties  could  be  trusted  to  permanently  adhere  to  an 
arrangement.  The  project  for  an  international  agreement 
never  reached  the  point  where  these  difficulties  were  of- 
ficially considered.  Their  presence,  however,  was  often 
referred  to  and  strengthened  the  conviction  derived  from 
other  objections  among  European  statesmen,  that  a  work- 
able international  agreement  was  unattainable. 

Upon  the  question  of  the  ratio  there  was  not  only  the 
difference  between  existing  coinage  ratios  to  be  dealt  with, 
especially  the  difference  of  more  than  three  per  cent,  be- 
tween the  ratio  of  the  Latin  Union  (15^  to  i)  and  the  ratio 
of  the  United  States  (16  to  i),  but  the  still  more  important 
question  whether  in  framing  a  new  agreement  any  of  the 
old  legal  ratios  should  be  taken  or  some  approximation  to 
the  market  ratio  should  be  preferred.  Any  change  in  the 

1  On  the  Probable  Fall  in  the  Value  of  Gold,  p.  34. 
366 


INTERNATIONAL    BIMETALLISM 

ratio  of  a  given  country  might  involve  sending  to  the 
melting-pot  its  entire  silver  coinage.  This  might  be 
avoided  by  selecting  that  ratio  which  gave  the  highest 
nominal  value  to  silver,  but  this  would  have  been  contrary 
to  the  steady  downward  tendency  of  silver  bullion  in  the 
market.  If  the  ratio  of  the  Latin  Union  were  adopted,  it 
would  compel  the  United  States  to  remint  their  great 
stock  of  silver  dollars  issued  at  the  ratio  of  16  to  i .  Other- 
wise these  pieces  would  flood  the  mints  of  France,  where 
the  same  amount  of  silver  would  coin  into  a  larger  num- 
ber of  equivalents  of  the  unit  of  gold.  If  a  bimetallic 
agreement  accomplished  its  full  purpose  of  raising  silver 
bullion  absolutely  to  the  legal  ratio,  then  it  would  be 
worth  more  than  the  value  put  upon  it  by  the  American 
mint  laws,  the  coins  in  circulation  would  possess  a  higher 
bullion  value  than  the  value  expressed  on  their  face,  and 
they  would  disappear  from  use. 

If  the  suggestion  were  adopted,  which  to  moderate  bimet- 
allists  seemed  the  more  reasonable  one  after  the  great  fall 
in  silver,  that  a  closer  approximation  to  the  market  ratio 
should  be  made  in  adopting  a  new  ratio  for  an  international 
monetary  union,  then  every  country  having  any  consider- 
able volume  of  silver  coin  issued  at  the  old  ratios  would  be 
subject  to  a  large  expense  in  reconstituting  its  currency. 
In  the  case  of  France  it  was  estimated  that  a  loss  of  about 
$230,000,000  would  fall  upon  the  money  value  of  the  silver 
coinage  in  bringing  the  metal  contents  of  the  five-franc 
pieces  up  to  a  ratio  of  35  to  i.1  In  the  case  of  the  United 
States,  with  an  outstanding  coinage  of  standard  silver 
dollars  in  1892  amounting  to  $360,000,000,  a  change  of  the 
ratio  to  35  to  i  would  have  caused  a  similar  shrinkage  of 
about  $200,000,000.  It  might,  indeed,  be  argued  that  such 
a  juggling  with  the  face  value  and  the  market  value  of  the 
medium  of  exchange  did  not  involve  a  real  economic  loss 
to  the  country ;  but  this  is  not  an  argument  which  would 

1  Darwin,  p.  51. 
367 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

weigh  strongly  with  responsible  ministers  if  compelled  to 
include  in  the  budget  an  appropriation  for  so  large  an 
amount  or  provision  for  a  public  loan  incurred  to  cover  the 
nominal  loss.1 

The  question  of  the  permanency  of  an  international 
bimetallic  agreement  would  not,  however,  be  wholly  one 
of  economic  theory  nor  even  of  national  good  faith.  It 
would  be  in  part  a  practical  question  of  the  fiscal  resources 
and  political  policy  of  the  contracting  powers.  As  it  is 
admitted  by  moderate  bimetallists  that  the  co-operation 
of  the  leading  nations  would  be  necessary  to  the  successful 
maintenance  of  a  fixed  ratio  between  the  metals,  in  order 
to  widen  the  market  for  silver,  it  would  follow  that  the 
sudden  contraction  of  this  market  by  the  withdrawal  of 
any  leading  nation  from  the  agreement  would  have  a  dis- 
turbing effect  on  the  ratio.  Would  such  a  withdrawal 
be  probable  ?  And  what  might  be  the  inducements  for  it  ? 

We  may  dismiss  for  the  moment  the  economic  reasons 
which  might  lead  a  nation  to  abandon  the  bimetallic  union 
from  choice,  to  consider  those  only  which  might  make 
withdrawal  compulsory.  The  simplest  type  of  such 
reasons  would  be  the  necessity  of  suspending  specie  pay- 
ments. This  has  happened  too  often  in  monetary  history 
to  be  treated  as  a  negligible  factor.  Such  a  possibility 
is  a  standing  menace  to  any  project  for  international 
coinage  which  makes  forced  legal  tender  of  any  form  of 
money  which  is  not  of  full  intrinsic  value.  It  might  in- 
deed be  argued  that  with  the  ratio  fully  established, 
suspension  of  specie  payments  would  have  an  effect  no 
more  adverse  to  silver  than  to  gold,  since  both  would  be 
expelled  from  the  country  which  fell  to  a  paper  basis,  and 
each  would  flood  equally  the  channels  of  circulation  of  the 

1  Among  the  expedients  which  have  been  suggested  for  getting 
over  the  difficulty  is  the  continuance  of  the  old  coins  as  tokens  at 
their  face  value — "that  if  new  pieces  are  coined,  the  old  five-franc 
pieces  should  remain  and  circulate  side  by  side  with  the  others." 
— Lord  Aldenham,  p.  41. 

368 


INTERNATIONAL    BIMETALLISM 

specie-paying  countries.  This  might  theoretically  be  the 
case  if  the  bimetallic  union  had  been  proved  by  many 
years'  experience  to  be  capable  of  maintaining  silver  in 
equal  esteem  with  gold  at  the  coinage  ratio;  but  it  is 
precisely  this  point  which  a  union  would  be  formed  to 
establish  and  which  would  be  gravely  threatened  by  early 
withdrawals.  If  it  be  seriously  maintained  that  such 
withdrawals,  by  suspension  of  specie  payments,  would  not 
threaten  the  legal  ratio,  then  by  a  process  of  elimination 
of  one  country  after  another  we  should  reach  the  con- 
clusion that  the  ratio  could  be  maintained  by  any  single 
country  which  offered  the  hospitality  of  its  mints  equally 
to  both  metals.  But  this  experiment  has  been  tried ;  the 
republic  of  Mexico  has  been  the  last  to  admit  its  futility. 

If  a  bimetallic  agreement  had  been  inaugurated  in  1860, 
the  United  States  would  have  abandoned  it  in  1861,  by 
the  suspension  of  specie  payments  due  to  the  Civil  War, 
and  remained  outside  of  it  for  eighteen  years;  Russia 
would  have  withdrawn  in  1863  and  returned  only  in  1897 ; 
Austria-Hungary  would  have  been  in  a  chronic  state  of 
suspension  after  1867 ;  France  would  have  been  out  of  the 
union  from  1870  to  1875;  Italy  would  have  withdrawn  in 
1866  and  returned  permanently  only  in  1902,  and  Spain 
would  have  been  a  broken  reed  to  the  union  continuously 
after  1891.  These  instances  of  the  suspension  of  specie 
payments  show  how  powerless,  even  if  they  had  the  will, 
would  these  great  states  have  been  to  maintain  a  definite 
ratio  between  two  metals  which  depended  for  its  main- 
tenance upon  their  affording  a  continuing  and  unimpeded 
market  for  both  metals  as  legal-tender  money. 

Whether  there  would  be  from  the  outset,  in  case  of  an 
international  bimetallic  agreement,  a  sincere  determina- 
tion to  maintain  such  an  agreement  would  in  itself  be 
important,  quite  apart  from  the  unavoidable  dangers  of 
specie  suspension.  So  long  as  the  preference  for  gold  pre- 
vailed in  the  commercial  community,  no  important  state 
would  view  without  disquiet  the  decline  of  its  gold  stock 

I—  24  369 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

and  the  increase  of  its  silver  money.  As  Darwin  points 
out,  in  opposing  too  low  a  ratio  for  an  international  agree- 
ment : l 

"Greater  facilities  would,  perhaps,  be  given  for  the 
coinage  of  gold  rather  than  for  the  coinage  of  silver;  and 
this  might  be  done  in  ways  difficult  to  control  by  inter- 
national agreement.  The  fear  that  other  nations  were 
doing  these  things  would  make  every  government  sus- 
picious, and  this,  in  itself,  would  be  an  element  of  in- 
stability. If  any  one  of  the  great  powers  had  either  hoard- 
ed a  large  amount  of  gold,  or  had  in  any  way  attracted  an 
unusual  supply  of  that  metal  within  its  dominions,  its 
government  might  be  tempted  to  adopt  monometallism, 
in  the  hope  that  this  action  would  break  up  the  Bimetallic 
Union  and  destroy  the  bimetallic  tie,  and  that  this  would 
lead  to  an  increase  in  the  value  of  their  gold  currency  and 
reserves;  this  would  be  especially  probable  at  the  com- 
mencement of  a  war,  when  one  or  other  of  the  combatants 
might  think  they  could  thus  gain  a  distinct  advantage 
over  their  opponents." 

That  difficulties  of  this  sort  would  render  unattainable 
an  enduring  international  agreement  for  the  concurrent 
coinage  of  gold  and  silver  became  only  too  apparent  with 
the  failure  of  repeated  efforts  by  diplomacy  and  inter- 
national conferences  to  reach  such  an  agreement.  Al- 
ready, almost  as  soon  as  the  gold  standard  was  adopted 
by  Germany  in  1873,  a  reaction  broke  out  against  the 
separation  of  the  two  metals.  France  continued  to  be 
prosperous  under  the  limping  standard,  and  her  most  dis- 
tinguished bimetallists — Cernuschi,  Le"on  Say,  Wolowski, 
and  others — resisted  the  demand  of  the  gold  standard 
advocates — Chevalier,  Parieu,  Bonnet,  and  Leroy-Beaulieu 
— that  France  should  abandon  silver  as  full  legal  tender.2 
In  England  the  disturbance  of  the  ratio  between  the  pound 
sterling  and  the  silver  rupee  of  British  India  was  quick 

1  Bimetallism,  p.   103.  *  Russell,  p.   144. 

370 


INTERNATIONAL    BIMETALLISM 

to  attract  attention,  and  in  Holland  in  1876  the  initial 
steps  were  taken  which  ended  in  the  International  Mone- 
tary Conference  of  1878. 

In  the  United  States,  Congress  had  already  by  a  joint 
resolution  of  August  15,  1876,  appointed  a  joint  committee 
of  eight  members,  known  as  the  "Silver  Commission," 
which  submitted  an  elaborate  report  on  March  2,  1877. 
The  majority  of  this  commission  reported  in  favor  of  "the 
restoration  of  the  double  standard  and  the  unrestricted 
coinage  of  both  metals."  The  other  three  members  did 
not  favor  free  coinage  by  the  United  States  without  the 
concurrence  of  other  nations.  The  United  States  took 
the  initiative  in  proposing  an  international  conference, 
which  met  in  Paris  on  August  10,  1878. 

The  German  government  refused  from  the  outset  to 
participate  in  the  conference,  because  Germany  had  just 
established  a  gold  standard.  Great  Britain  accepted  only 
upon  the  assurance  that  the  subject  of  an  international 
coin  should  be  considered,  and  her  delegates  declared, 
through  Mr.  Goschen,  that  they  were  bound  by  their  in- 
structions to  vote  for  no  proposition  compromising  the 
gold  standard.2  The  delegates  of  Belgium  and  Switzer- 
land declared  themselves  in  favor  of  gold,  and  the  con- 
ference broke  up  without  any  practical  results.  The 
majority  of  the  delegates  of  the  European  states  presented 
resolutions  declaring  "that  the  question  of  the  restriction 
of  the  coinage  of  silver  should  equally  be  left  to  the  dis- 
cretion of  each  State  or  group  of  States,"  and  that  the 
differences  of  opinion  which  had  developed  "exclude  the 
discussion  of  the  adoption  of  a  common  ratio  between 
the  two  metals."3  The  American  delegates — Mr.  R.  E. 
Fenton,  Mr.  W.  S.  Groesbeck,  General  Francis  A.  Walker, 
and  their  secretary,  Mr.  S.  Dana  Horton — filed  a  protest 
against  this  decision. 

1  Reports  of  the  Silver  Commission  of  1876,  Sen.  Report  703, 
44th  Congress,  2d  Session,  p.  126.  J  Russell,  p.  203. 

s  International  Monetary  Conference  of  1878,  p.  163. 

371 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

A  second  attempt  to  form  a  bimetallic  union  was  made 
in  the  summer  of  1881  by  concurrent  invitations  of  the 
American  and  French  governments.  Their  delegates, 
through  Mr.  Evarts,  lately  Secretary  of  State  of  the  United 
States,  again  urged  the  formation  of  an  international 
agreement,  and  the  delegates  of  the  European  states  voted 
"that  there  is  ground  for  believing  that  an  understanding 
may  be  established  between  the  states  which  have  taken 
part  in  the  conference ;  but  that  it  is  expedient  to  suspend 
its  meetings."  An  adjournment  was  taken  until  April 
12,  1882,  but  the  conference  was  never  reassembled.1 

A  third  attempt  to  secure  an  international  agreement 
was  made  at  the  suggestion  of  the  United  States  in  1892, 
but  the  invitations  were  limited  to  the  purpose  of  securing 
a  larger  use  for  silver.  The  British  government  was  un- 
willing to  enter  a  conference  with  the  declared  purpose  of 
restoring  the  free  coinage  of  both  gold  and  silver,  and  the 
form  of  the  invitations  was  adapted  by  the  United  States 
to  their  position,  in  order  to  secure  their  participation  in 
the  conference.  The  delegates  of  the  United  States  were 
Senator  Allison,  of  Iowa,  Senator  Jones,  of  Nevada,  Rep- 
resentative McCreary,  of  Kentucky,  Mr.  Henry  W.  Can- 
non, of  New  York,  formerly  Comptroller  of  the  Currency, 
Professor  E.  Benjamin  Andrews,  President  of  Brown 
University,  and  Mr.  Edward  O.  Leech,  Director  of  the 
Mint.  Several  propositions  for  the  purchase  and  coinage 
of  silver  on  government  account  in  limited  quantities  were 
submitted  to  the  conference,2  but  it  was  again  found  that 


1  International  Monetary  Conference  of  1881,  p.  506. 

J  The  proposition  most  discussed  was  that  of  Lord  Alfred  de 
Rothschild,  one  of  the  British  delegates,  that  if  the  United  States 
would  continue  their  purchases  under  the  Sherman  law,  "the 
different  European  powers  should  combine  to  make  certain  yearly 
purchases,  say  to  the  extent  of  about  £5,000,000  sterling  annually, 
which  purchases  to  be  continued  over  a  period  of  five  years  at  a 
price  not  exceeding  43  pence  per  ounce  standard;  but  if  silver 
should  rise  above  that  price  the  purchases  for  the  time  being  to  be 

372 


INTERNATIONAL    BIMETALLISM 

an  agreement  could  not  be  reached,  and  an  adjournment 
was  taken  on  December  17,  1892,  until  May  30,  1893.  The 
German  delegates  were  unwilling  to  bind  their  govern- 
ment to  the  policy  of  a  second  meeting,  and  the  events  of 
the  winter  were  so  little  favorable  to  bimetallism  that 
President  Cleveland,  who  entered  office  in  March,  did  not 
feel  justified  in  seeking  a  reassembling  of  the  conference. 
Still  another  attempt  was  made  in  1897,  in  a  less  formal 
way,  to  secure  the  assent  of  certain  leading  countries  to 
the  bimetallic  system.  The  proposition  was  narrowed 
down  to  a  tentative  agreement  between  representatives  of 
France  and  the  United  States,  that  they  would  throw  open 
their  mints  to  free  coinage,  if  the  government  of  British 
India  would  take  the  same  step,  and  afterwards  a  sufficient 
number  of  other  nations  should  join  to  insure  the  main- 
tenance of  parity.1  Although  the  project  received  a  cer- 
tain measure  of  support  from  the  India  office  in  London,  it 
was  rejected  by  the  Government  of  India  in  a  despatch  of 
September  16,  1897,  upon  the  ground  that  it  would  "be 
most  unwise  to  reopen  the  mints  as  part  of  the  proposed 
arrangements,  especially  at  a  time  when  we  are  to  all  ap- 
pearance approaching  the  attainment  of  stability  in  ex- 
change by  the  operation  of  our  own  isolated  and  inde- 
pendent action."2 

immediately  suspended." — Conference  Monitaire  Internationale, 
1892,  Proces  Verbaux,  p.  48. 

1  Vide  address  of  Senator  Wolcott,  one  of  the  American  com- 
missioners, in  the  United  States  Senate,  January  17,  1898. 

1  Report  of  the  Indian  Currency  Committee  of  1898,  Commission 
on  International  Exchange,  1903,  p.  303. 


VI 

EVOLUTION  OF  THE  GOLD-EXCHANGE  STANDARD 

A  new  method  of  approaching  the  problem  of  stable  exchange 
between  gold  and  silver  countries — How  events  forced  the  limp- 
ing standard  upon  France,  British  India,  and  the  United  States 
— How  it  was  adapted  by  proper  changes  to  the  needs  of  silver- 
using  countries — The  monetary  system  of  the  Philippine  Islands 
— Methods  of  maintaining  parity — Adoption  of  similar  systems 
in  Panama  and  Mexico — The  problem  of  stable  exchange  with 
China. 

THE  extension  of  the  gold-exchange  standard  in  re- 
cent years  to  countries  formerly  upon  a  silver  basis 
has  been  one  of  the  most  striking  illustrations  in  monetary 
history  of  the  adaptation  to  actual  conditions  and  local 
needs  of  constructive  legislation.  The  adoption  of  this 
standard  in  Java  and  British  India  was  a  recognition  by 
law  of  the  evolution  of  events ;  but  while  their  experience 
afforded  an  illuminating  example,  the  establishment  of  the 
gold-exchange  standard  in  the  Philippine  Islands,  Mexico, 
and  Panama  was  the  result  of  a  definite  constructive 
policy  based  upon  the  application  to  existing  conditions 
of  sound  monetary  theory. 

It  has  already  been  pointed  out  that  the  terms  "gold 
exchange  standard"  and  "limping  standard"  are  to  some 
extent  interchangeable.  If,  however,  a  distinction  may 
be  made,  it  is  that  the  limping  standard  represents  a 
crystallization  by  law  and  custom  of  accidental  conditions, 
which  have  not  always  been  favorable  to  the  smooth 
working  of  the  system,  while  the  gold-exchange  standard 
represents  a  monetary  system  consciously  constructed 

374 


THE    GOLD-EXCHANGE    STANDARD 

upon  a  sound  basis,  adapted  to  conditions  and  fully  guard- 
ed in  its  actual  operation. 

The  limping  standard  came  into  operation  in  the  coun- 
tries of  the  Latin  Union  as  a  natural  result  of  the  wide  de- 
parture of  the  relative  bullion  values  of  silver  and  gold 
from  the  official  ratio  fixed  by  the  coinage  laws.  These 
causes  were  considered  by  the  law-making  powers  of  those 
countries  as  compelling  action  to  prevent  the  loss  of  their 
gold  and  their  descent  to  the  silver  basis.  It  was  rec- 
ognized that  gold  was  the  preferred  money  of  modern 
commerce  by  reason  of  its  large  value  in  small  bulk,  its 
facility  of  transportation,  and  its  availability  for  foreign 
trade  and  bank  reserves.  But  it  was  recognized  from  the 
beginning  that  none  of  these  countries  could  well  afford 
to  part  with  their  entire  mass  of  silver  at  its  bullion  price, 
and  that  the  attempt  to  dispose  of  it  would  so  weigh  down 
the  market  with  silver  bullion  that  it  could  be  sold  only  at 
a  still  greater  loss,  if  it  could  be  sold  at  all.  Events,  rather 
than  deliberate  choice,  therefore,  forced  upon  the  coun- 
tries of  the  Latin  Union  the  continued  use  of  their  silver 
coins. 

If  the  annual  gold  production  of  the  world  had  con- 
tinued nearly  stationary  in  the  face  of  a  growing  demand, 
as  was  the  case  from  1873  to  1888,  and  the  countries  of 
the  Latin  Union  and  the  United  States  had  deliberately 
sought  to  replace  the  bulk  of  their  silver  coinage  with 
gold,  as  in  the  monetary  systems  of  Great  Britain  and 
Germany,  then  indeed,  with  the  expanding  demand  for 
gold  in  the  arts,  "the  scramble  for  gold,"  which  has  been 
the  nightmare  of  bimetallic  dreams,  might  have  become 
a  reality.  Such  an  influence  was  probably  more  felt 
about  the  time  of  the  international  conference  of  1881, 
than  even  at  a  later  date,  although  the  anxiety  then  ex- 
pressed on  the  subject  of  the  scarcity  of  gold  was  as  ex- 
aggerated as  were  the  fears  felt  after  1850  over  the  ab- 
normal increase  of  gold.  It  was  at  the  conference  of  1881 
that  the  German  delegates  came  forward  with  the  sugges- 

375 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

tion  that  Germany  would  check  her  sales  of  old  silver 
bullion,  withdraw  small  gold  pieces,  and  notes  of  small 
denominations,  and  break  up  her  large  silver  coins  into 
smaller  pieces.1  It  was  of  especial  significance  that  such 
proposals  should  come  from  Germany,  because  she  had 
refused  to  send  delegates  to  the  international  conference 
of  three  years  before.  It  was  at  the  conference  of  1881 
also  that  Mr.  Broch,  the  delegate  of  Norway,  arguing 
strongly  in  favor  of  the  gold  standard  among  the  civilized 
countries  of  the  West,  declared  that  the  true  field  for 
silver  was  to  be  found:2 

"Not  by  arbitrarily  raising  the  value  of  this  metal  in 
Europe  and  America,  but  by  encouraging  its  use  in  the 
countries  of  the  Orient  which  still  have  a  preference  for 
it;  in  that  vast  Chinese  Empire,  scarcely  yet  opened  to 
Europe,  in  that  immense  African  continent,  which  is  to- 
day invaded  from  all  sides,  and  where  trade  is  still  carried 
on  under  the  primitive  form  of  barter,  but  where  it  would 
no  doubt  be  easy  to  introduce  the  use  of  silver  money." 

These  expressions  of  Mr.  Broch  anticipated  to  some 
extent  the  actual  course  of  events.  The  influence  of  the 
status  quo  always  imposes  itself  with  compelling  force  upon 
statesmen,  however  it  may  be  disregarded  by  theorists. 
In  the  case  of  the  countries  of  the  Latin  Union  and  the 
United  States,  it  was  not  possible,  without  great  loss  to 
the  budget  and  an  economic  upheaval,  to  substitute  gold 
currency  for  the  silver  coins  in  use.  It  was  possible  to 
rescue  the  monetary  system  from  disaster  by  taking  under 
government  control  the  output  of  silver  coins,  and  thereby 

1  International  Monetary  Conference  of  1881,  pp.  29,  30. 

2  International  Conference  of  1881,  p.  45.     A  similar  suggestion 
had  been  made  by  Feer-Herzog,  of  Switzerland,  at  the  Paris  con- 
ference of  1867:  "The  world  is  divided  in  its  monetary  relation 
into  two  considerable  and  very  distinct  groups:  on  one  side  the 
Western  States,  where  gold  tends  more  and  more  to  prevail;  on 
the  other,  the  countries  of  the  extreme  East,  where  silver  continues 
to  predominate." — International  Monetary  Conference  of  1878, 
p.  824. 

376 


THE    GOLD-EXCHANGE    STANDARD 

withholding  the  premium  offered  to  owners  of  silver 
bullion  to  deluge  the  country  with  their  product  through 
the  mints. 

An  interesting  suggestion  for  obtaining  the  benefits  of 
the  law  of  compensation,  without  the  evils  of  concurrent 
free  coinage  for  two  metals  of  fluctuating  value,  was  made 
some  years  ago  by  Walras  in  a  little  pamphlet  entitled 
Theorie  de  la  Monnaie.  He  frankly  rejected  the  conten- 
tion of  the  bimetallic  school  that  it  was  possible  by  law  to 
give  absolute  fixity  of  relationship  to  two  different  com- 
modities. He  proposed  that  whichever  happened  for  the 
moment  to  be  the  cheaper  metal  should  be  treated  as  a 
token  coin — that  its  free  coinage  on  private  account  should 
be  suspended  and  that  its  output  should  be  regulated  by 
government.  Admitting  the  necessity  for  the  adoption, 
under  present  conditions,  of  a  new  ratio  between  gold  and 
silver,  he  maintained  that  silver  should  be  coined  by  the 
government  whenever  there  developed  a  scarcity  of  money 
as  indicated  by  a  low  mean  of  prices,  but  that  such  coinage 
should  cease  before  the  security  of  the  standard  was 
threatened  by  excessive  exportation  of  the  standard 
metal.  Carried  thus  far,  his  project  was  not  beyond  the 
pale  of  the  world  of  realities.  He  proposed,  however,  in 
making  the  project  of  universal  application  without  regard 
to  time  or  space,  that  if  gold  should  again  fall  below  silver 
at  the  coinage  ratio,  then  the  mints  should  be  closed  to  the 
free  coinage  of  gold,  and  its  output  should  in  turn  be  reg- 
ulated by  the  government.  An  international  agreement 
he  conceded  to  be  necessary  to  carry  out  this  system  with- 
out inviting  the  evils  which  would  follow  an  excessive 
coinage  of  the  undervalued  metal  by  any  one  nation.  He 
declared  that  otherwise,  "if  the  Latin  Union  alone  re- 
sumed the  coinage  of  crown  pieces,  the  first  effect  of  this 
resumption  would  be  to  make  all  its  gold  drift  abroad,  and 
to  leave  it  deprived  of  its  standard  money."  * 

1  Thiorie  de  la  Monnaie,  p.  80. 
377 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

Walras  pointed  out  that  if  these  evils  were  restricted 
by  an  international  agreement,  it  would  be  necessary  also 
that  the  principal  monetary  powers  should  regulate  their 
issues  of  government  paper  and  of  legal-tender  bank-notes 
in  the  same  way  as  their  output  of  token  coins  or  control 
of  the  variations  of  the  value  of  money  would  prove  illu- 
sory. In  this  theory,  so  thoughtfully  worked  out  by  Wal- 
ras, lies  an  intelligent  diagnosis  of  the  end  towards  which 
the  leading  countries  with  the  limping  standard  have,  un- 
der the  pressure  of  events,  been  blindly  groping.  Each  of 
these  countries  has  contributed  towards  diminishing  the 
pressure  upon  gold,  and  towards  the  prevention  of  undue 
changes  in  the  relations  of  the  stock  of  money  to  com- 
modities, by  keeping  in  circulation  token  coins  of  full  legal- 
tender  power  up  to  the  limit  of  the  amount  demanded  by 
the  needs  of  trade. 

Under  the  pressure  of  events  this  theory  took  form  in 
British  India,  where  use  is  found  for  nearly  $500,000,000 
in  full  legal-tender  silver,  but  where  all  this  silver  is  main- 
tained at  a  fixed  ratio  with  gold.  The  British  govern- 
ment by  the  act  of  1899,  established  a  gold  fund  in  India 
and  at  London,  for  the  purpose  of  maintaining  the  parity 
of  the  standard  silver  coin  with  gold.  This  coin,  known 
as  the  rupee,  contained  silver  worth  originally  a  little  less 
than  fifty  cents  in  American  money,  but  it  fell  gradually 
to  nearly  the  level  of  silver  bullion  until  1893.  In  that 
year,  as  the  result  of  the  report  of  the  Indian  Currency 
Commission,  the  free  coinage  of  rupees  was  suspended,  and 
the  attempt  was  made  to  fix  their  value  at  sixteen  pence, 
or  about  thirty -two  cents  in  American  money.  At  first 
the  experiment  was  difficult.  There  was  a  surplus  of 
rupees,  and  they  poured  out  in  great  quantities  from 
hoards  when  it  was  found  that  their  legal  value  had  been 
raised  above  their  bullion  value.  The  government, 
however,  persevered  in  selling  exchange  on  India  at  Lon- 
don at  rates  as  near  the  new  ratio  as  could  be  obtained, 
and  in  receiving  rupees  at  that  ratio  for  public  dues.  Under 

378 


THE    GOLD-EXCHANGE    STANDARD 

ordinary  conditions  these  measures  would  almost  of  them- 
selves have  maintained  a  limited  silver  coinage  at  par  with 
the  standard.  While  this  result  was  delayed  in  India, 
it  was  so  completely  achieved  by  1899  that  in  that  year 
the  Indian  government  felt  strong  enough  to  establish  a 
gold  reserve  and  offer  to  deliver  silver  rupees  for  gold.  The 
offer  was  not  made  at  first  to  pay  gold  for  rupees,  but  it 
was  soon  found  that  the  limitation  of  the  coinage  had 
created  a  demand  for  rupees  which  drew  gold  into  the 
Treasury  instead  of  drawing  it  out. 

After  the  failure  of  the  last  efforts  to  secure  bimetallism 
by  international  agreement  in  1897,  the  course  of  exchange 
between  the  gold  countries  and  the  silver  countries  be- 
came still  more  erratic  and  disturbing  to  trade  than  it  had 
previously  been.  Maximum  and  minimum  quotations 
for  silver  bullion  in  the  London  market  were  as  far  apart 
in  1901  as  29T\  pence  and  24%%  pence,  or  a  variation  of 
more  than  fifteen  per  cent.  In  1902  the  maximum  quo- 
tation fell  to  26^  pence  per  ounce,  and  the  minimum  final- 
ly dropped  in  December  to  2i{£  pence  per  ounce,  or 
about  thirty  per  cent,  below  the  maximum  of  the  year 
1900. * 

It  was  keenly  realized  by  the  financiers  and  economists 
of  the  silver  countries  that  their  trade  was  being  greatly 
hampered  by  these  violent  fluctuations.  Accordingly,  the 
government  of  Mexico  took  the  initiative  in  the  autumn 
of  1902  in  seeking  the  co-operation  of  the  imperial  gov- 
ernment of  China  and  the  government  of  the  United 
States  in  a  new  method  of  steadying  the  exchanges.  There 
was  a  strong  movement  in  Mexico  to  adopt  the  gold 
standard,  but  it  was  felt  that  this  could  not  be  done  upon 
the  same  basis  as  in  the  richer  gold-standard  countries, 
because  of  the  importance  to  Mexico  of  her  silver-mining 

1  The  London  price  is  for  "standard  silver,"  0.925  fine,  while 
the  New  York  price  is  for  "fine  silver,"  0.999  fine;  so  tnat  tne 
equivalents  of  London  prices  in  American  currency  require  other 
calculations  than  the  reduction  of  the  currencies. 

379 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

interests.  Mexico  and  the  United  States  were  the  largest 
producers  of  silver  in  the  world,  producing  between  them 
two-thirds  of  the  entire  product.  The  problem  was  more 
important,  however,  to  Mexico  than  to  the  United  States, 
because  silver  formed  nearly  forty  per  cent,  of  the  value  of 
her  exports.  It  was  felt,  therefore,  by  Mexican  statesmen 
that  it  was  a  condition  of  vital  importance  in  changing  to 
the  gold  standard  that  steps  should  be  taken  to  prevent 
another  serious  fall  in  the  value  of  silver. 

The  method  decided  upon  by  the  Mexican  government 
for  remedying  the  evils  of  fluctuating  exchange  was  sub- 
stantially the  adoption  of  the  gold-exchange  standard. 
The  government  of  the  Philippine  Islands  had  recently  re- 
quested authority  from  the  Congress  of  the  United  States 
to  adopt  a  definite  gold-exchange  system  in  the  Philippines, 
and  official  commissions  were  sitting  in  London  and  in 
Paris  to  consider  the  adoption  of  some  means  of  steadying 
exchanges  in  the  British  colonies  in  the  Orient  and  in 
French  Indo-China.  It  was,  therefore,  with  a  view  to 
harmony  among  these  nations  that  Mexico  asked  the  co- 
operation of  the  United  States  and  China  in  seeking  to 
bring  about  greater  stability  of  exchange  between  the 
moneys  of  the  gold-standard  countries  and  the  silver-using 
countries.  The  support  of  the  American  government  was 
cordially  granted,  and  a  commission  was  appointed  to  co- 
operate with  that  of  Mexico  in  conferring  with  the  powers 
having  important  colonial  and  commercial  interests  in  the 
Orient.1  The  objects  of  the  commission  in  visiting  Europe 
were  to  explain  to  the  representatives  of  European  powers 

1  The  appointment  of  this  commission  was  preceded  by  an  in- 
formal conference  in  the  city  of  Mexico  in  March,  1903,  between 
representatives  of  the  Mexican  government  and  three  Americans 
who  were  invited  to  Mexico  for  the  purpose — Professor  Jeremiah 
W.  Jenks,  of  Cornell  University,  Edward  Brush,  of  Greenwich, 
Connecticut,  and  the  writer  of  the  present  work.  The  members 
of  the  American  commission  appointed  by  President  Roosevelt 
were  Hugh  H.  Hanna,  of  Indianapolis;  the  writer  of  the  present 
work,  and  Professor  Jenks. 

380 


THE    GOLD-EXCHANGE    STANDARD 

the  benefits  of  putting  China  upon  a  gold-exchange  stand- 
ard, and  to  bring  British,  French,  German,  Russian,  and 
American  dependencies  in  the  Orient  to  a  similar  coinage 
basis. 

The  result  of  the  American  mission  was  an  agreement 
between  representatives  of  all  the  governments  visited — 
those  of  Great  Britain,  France,  The  Netherlands,  Ger- 
many, and  Russia — which  was  well  expressed  by  the  first 
resolution  adopted  at  London:1 

"That  the  adoption  in  silver-using  countries  of  the  gold 
standard  on  the  basis  of  a  silver  coin  of  unlimited  legal 
tender,  but  with  a  fixed  gold  value,  would  greatly  pro- 
mote the  development  of  those  countries  and  stimulate 
the  trade  between  those  countries  and  countries  already 
possessing  the  gold  standard,  besides  enlarging  the  in- 
vestment opportunities  of  the  world." 

There  was  not  absolute  agreement  among  the  various 
powers  in  regard  to  the  best  means  of  reaching  this  result, 
but  in  most  cases  it  was  agreed  that  the  ratio  of  32  to  i 
should  be  adopted  as  the  relation  between  the  gold  stand- 
ard and  the  new  silver  coins.  This  fundamental  resolution 
was  an  indorsement  of  the  principle  of  the  gold-exchange 
standard.  It  remained  to  put  this  resolution  in  force  in 
as  many  countries  and  dependencies  as  circumstances  per- 
mitted. 

The  government  of  the  United  States  took  action  before 
the  departure  of  the  American  commission  for  Europe  by 
enactment  of  a  law  for  the  establishment  of  the  gold -ex- 
change standard  in  the  Philippine  Islands.2  Subsequent- 
ly, in  the  summer  of  1904,  by  agreement  between  the 
governments  of  the  United  States  and  the  republic  of 
Panama,  a  similar  system  was  established  for  use  in 
Panama  and  in  the  Canal  Zone,  which  was  leased  to  the 

1  Report  of  the  Commission  on  International  Exchange,  1903, 
p.  141. 

1  Act  of  March  2,  1903,  Vide  Report  of  the  Commission  on  In- 
ternational Exchange,  1903,  p.  403. 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

United  States.1  Action  was  not  taken  by  Mexico  until 
near  the  close  of  1904,  but  the  gold-exchange  standard 
was  put  in  full  operation  from  May  i,  1905.  The  relative 
stability  of  silver  during  the  year  1904  tended  to  promote 
stability  of  exchange  between  Mexico  and  New  York,  and 
made  the  transition  easy  from  the  standard  of  the  Mexican 
silver  peso  to  the  new  parity  of  two  to  one  in  American 
gold.  The  mere  announcement  of  the  adoption  of  the 
gold-exchange  standard  brought  exchange  down  to  about 
205,  and  soon  after  to  202,  or,  with  due  allowance  for  the 
costs  of  shipping  gold,  substantially  to  the  new  parity. 
In  the  Oriental  dependencies  of  Great  Britain  and  France 
the  movement  towards  a  fixed  exchange  has  been  some- 
what slower,  but  free  coinage  of  silver  has  been  suspended, 
and  eventually  in  both  countries  the  silver  unit  will  be 
given  a  fixed  parity  with  gold  at  a  ratio  of  about  32  to  i  .2 

In  two  important  particulars  the  plans  adopted  for  a 
gold -ex  change  standard  in  the  Philippines,  Panama,  and 
Mexico  differed  from  the  limping  system  brought  about 
by  circumstances  in  Java,  France,  British  India,  and  the 
United  States.  These  particulars  were  that  the  coinage 
ratio  between  gold  and  silver  was  adjusted  to  the  fall  in 
the  gold  value  of  silver  which  had  taken  place  since  1866, 
and  that  definite  provision  was  made  for  keeping  the  silver 
coins  at  parity  with  the  gold  standard  by  the  offer  to  sell 
gold  bills  of  exchange  at  fixed  rates  for  legal-tender  silver 
coins. 

The  ratio  adopted  in  the  Philippines  was  approximately 
32  to  i,  a  recognition  of  the  fact  that  silver  had  fallen  in 
relation  to  gold  by  at  least  fifty  per  cent,  since  the  adoption 

1  Report  of  the  Commission  on  International  Exchange,  1904, 
pp.  22-26. 

1  Pierre  Leroy-Beaulieu,  in  an  article  referring  to  the  Philippine 
currency  system,  remarks  that  "it  would  be  an  example  easy  and 
extremely  useful  to  follow  in  our  Indo-China,  where  we  are  losing 
precious  time  in  Oriental  discussions  on  this  subject,  as  on  many 
others." — Economiste  Franfais  (June  10,  1905),  p.  830. 

382 


THE    GOLD-EXCHANGE    STANDARD 

of  the  ratio  of  15^  to  i  by  France  and  15  to  i  by  the 
United  States  at  the  close  of  the  eighteenth  century.  In 
recognizing  this  fact  and  in  adopting  a  coin  similar  to  the 
Mexican  peso,  the  new  system  for  the  Philippines  prac- 
tically consecrated  existing  conditions  of  the  value  of  the 
coin  in  use  and  thereby  prevented  the  disturbance  of 
contracts  and  customary  prices  which  would  have  oc- 
curred if  a  different  system  had  been  adopted.  The  ex- 
change value  of  the  new  unit  was  fixed  at  fifty  cents  in 
American  gold  and  the  coin  was  made  of  approximately 
the  same  weight  and  fineness  as  the  Mexican  peso — 416 
grains,  nine-tenths  fine.  The  adoption  of  a  coinage 
"ratio"  of  about  32  to  i  was  not  intended  to  control  the 
value  of  silver  bullion,  but  simply  to  conform  to  its  recent 
price  tendencies.1  It  was  necessary,  however,  to  allow 
some  margin  for  changes  in  the  gold  price  of  silver  by 
deliberately  fixing  the  exchange  value  of  the  new  unit  at  a 
price  above  its  bullion  value  at  the  moment.  The  reasons 
for  such  an  allowance  were  set  forth  elsewhere  by  the 
present  writer  as  follows : 2 

"It  is  obvious  that  if  a  coin  were  adopted  which  rep- 
resented the  gold  price  of  silver  at  a  given  moment,  and 
silver  should  afterwards  rise  in  price,  the  silver  coins 
would  become  more  valuable  as  bullion  than  as  coins. 
They  would  go  to  the  melting  pot,  and  the  country  would 

1  The  American  Commission  of   1903  were  careful  to  explain 
thus  their  use  of  the  term:    "The  use  of  the  term  'ratio'  in  this 
connection  is  not  intended  to  imply  that  the  adoption  of  a  given 
ratio  of  weight  would  in  itself  fix  the  relation  of  value  between 
the  coins  and  the  gold  unit,  as  is  sought  by  the  policy  of  free  coin- 
age of  two  metals.     The  term  is  used  here  simply  to  define  the 
relationship  between  the  weight  of  the  silver  coins  and  the  gold 
unit.     It  is  not  proposed  that  the  new  coins  shall  depend  upon 
this  ratio  for  their  value;  that  value  will  depend  upon  the  measures 
taken  to  maintain  the  coins  at  par  with  the  gold  unit." — Report 
of  the  Commission  on  International  Exchange,  1903,  p.  25. 

2  "Putting  China  on  the  Gold  Standard,"  Wall  Street  and  the 
Country,  p.   193. 

383 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

be  denuded  of  its  currency.  For  this  reason  a  margin  of 
about  15  per  cent,  between  the  bullion  value  of  the  coins 
and  the  value  given  them  by  law  was  adopted  in  the  Phil- 
ippines, and  has  caused  no  difficulties  in  the  acceptance  of 
the  coins  at  their  full  face  value." 

Government  control  of  the  quantity  of  instruments  of 
exchange  goes  far  to  fix  their  value  if  it  restrains  the  quan- 
tity within  the  limits  of  demand;  but  the  effective  test 
of  these  limits  (as  we  shall  see  when  we  come  to  the  dis- 
cussion of  paper  currency)  is  the  ability  of  the  holder  of 
the  currency  to  convert  it  into  the  standard  at  will. 
Whenever  an  excess  appears  in  the  currency  of  a  country, 
that  excess  tends  to  go  to  other  countries  where  it  is 
likely  to  earn  a  higher  return.  The  only  money  which  is 
thus  accepted  abroad  among  commercial  nations  is  gold. 
A  community,  therefore,  which  proposes  to  maintain  its 
currency  at  absolute  equality  with  gold  must  face  the 
necessity  of  furnishing  gold  on  demand  for  export.  This 
is,  perhaps,  the  most  vital  principle  in  the  maintenance  of 
a  gold-exchange  standard — that  while  tokens  and  instru- 
ments of  credit  serve  well  the  purposes  of  interior  circu- 
lation, they  must,  in  order  to  meet  obligations  abroad, 
respond  to  the  touchstone  of  exchangeability  with 
gold. 

Inasmuch  as  the  demand  for  gold  is  a  demand  for  the 
use  of  the  metal  in  other  countries  rather  than  at  home, 
such  a  demand  will  be  effectively  met  by  furnishing  the 
gold  at  the  points  where  it  is  intended  to  be  delivered. 
What  was  done  by  the  government  of  the  Philippine 
Islands  was  to  establish  a  gold  fund  in  New  York,  against 
which  drafts  were  delivered  entitling  the  holder  to  gold 
at  New  York.  A  similar  policy  was  adopted  by  the 
government  of  Mexico.  It  was  a  similar  policy,  also, 
which  was  recommended  to  the  government  of  China  as  a 
means  of  securing  the  gold  standard.  If  gold  funds  are 
kept  at  the  leading  financial  centres,  London,  Paris, 
Berlin,  St.  Petersburg,  and  New  York,  drafts  can  be  sold 

384 


THE    GOLD-EXCHANGE    STANDARD 

upon  these  funds  whenever  there  is  a  demand  for  gold  for 
making  payments  abroad. 

There  is  one  essential  condition  to  the  successful  opera- 
tion of  this  system.  This  is  that  whenever  drafts  are  sold 
for  local  currency,  the  local  currency  paid  for  them  shall  be 
locked  up  and  withdrawn  from  circulation.  This  operates 
to  reduce  the  redundancy  of  the  currency  at  home,  to  stiffen 
rates  of  interest,  and  ultimately  to  influence  prices  of 
commodities  in  a  downward  direction.  Hence  the  new 
system  will  operate  under  this  arrangement  with  the  same 
automatic  precision  in  regulating  the  volume  of  the  cur- 
rency as  in  a  country  with  a  gold  currency,  like  Great  Brit- 
ain, where  the  exportation  of  gold  reduces  the  volume  of 
the  circulation,  and  by  making  money  scarce  reacts  upon 
rates  of  interest.  When  these  operations  have  produced 
their  effect  and  there  comes  later  a  renewed  demand  for 
currency  at  home,  that  demand  can  be  met  by  the  deposit 
of  gold  in  the  reserves  at  leading  foreign  centres,  thus  re- 
plenishing the  stocks  reduced  by  previous  drafts  and  re- 
leasing local  currency  to  meet  demands  for  increased  cir- 
culation. This  is  substantially  the  plan  which  has  been  in 
successful  operation  in  British  India,  where  rupees  are 
paid  out  at  a  fixed  rate  for  the  gold  coin  of  Great  Britain. 

Thus  far  the  experience  of  the  Philippines,  Panama, 
and  British  India  has  attested  the  soundness  of  these  prin- 
ciples by  their  successful  operation.  In  the  Philippines 
laws  of  a  somewhat  vigorous  character  were  required  to 
overcome  the  tendency  of  "Gresham's  law,"  to  keep  in 
use  the  currency  issued  on  a  silver  basis;1  but  as  soon  as 
the  new  currency  had  obtained  a  firm  footing  its  advan- 
tages over  the  previous  fluctuating  standard  were  general- 
ly recognized.  Any  holder  of  the  new  currency  was  au- 
thorized to  exchange  it  for  drafts  on  the  gold  funds  of  the 
Philippine  government  in  New  York  at  a  charge  of  three- 
quarters  of  one  per  cent,  for  demand  drafts  and  one  and 

1  Vide  Act  No.  1045  of  the  Philippine  Commission,  Report  of 
the  Commission  on  International  Exchange,  1904,  p.  308. 
»--»s  385 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

one-eighth  per  cent,  for  telegraphic  transfers.1  Parity 
was  thus  fully  maintained  and  the  Philippine  government 
was  able  to  report  to  Washington  that  the  gold  standard 
met  the  approval  of  the  entire  public  and  that  business 
conditions  were  much  improved.2 

In  British  India,  where  the  experiment  of  maintaining 
parity  seemed  most  doubtful,  because  of  the  necessity  of 
maintaining  the  value  of  $500,000,000  in  silver  at  the  arti- 
ficial ratio  of  about  24  to  i,  the  embarrassments  the 
government  has  suffered  in  recent  years  have  come  from 
the  growing  demand  for  silver  coins  rather  than  from 
pressure  on  the  gold  reserve.  The  sum  specially  set  aside 
as  a  gold  reserve  fund  increased  from  £3,810,730  on  March 
31,  1903,  to  £6,382,200  in  1904,  and  to  £10,984,000  in 
1905.  So  remote  is  the  probability  of  demands  upon  it 
that  it  has  been  invested  in  consols  and  other  government 
loans;  for,  in  addition  to  this  distinctive  fund,  there  is  a 
further  accumulation  of  gold  in  the  "currency  reserve" 
amounting  to  £10,494, 556  ($51,160,000),  available  for  the 
purchase  of  silver  for  further  coinage.3  So  heavy  have 
been  the  demands  for  silver  rupees,  under  the  stimulus  of 
large  crops,  railway  extension,  and  the  inflow  of  foreign 
capital,  that  measures  were  taken  in  1904  to  anticipate  the 
demand  by  accumulating  silver  bullion  at  the  mints  in 
advance  of  the  tender  of  gold.4 

To  confer  upon  China  the  benefits  of  a  similar  system 
was  one  of  the  chief  objects  of  the  American  and  Mexican 
commissions  in  their  conferences  with  European  powers 
in  1903.  In  dealing  with  the  subject  they  acted  at  the 
invitation  of  the  Chinese  imperial  government  and  with- 
out seeking  to  derogate  in  any  degree  from  the  political 

1  Act  No.  938  of  the  Philippine  Commission,  Report  of  the  Com- 
mission on  International  Exchange,  1903,  p.  409. 

J  Despatch  of  civil  governor,  October  30,  1904,  Report  of  the 
Commission  on  International  Exchange,  1904,  p.  297. 

8  Report  of  the  Commission  on  International  Exchange,  1904.  p. 
497.  4  London  Economist  (June  3,  1905),  LX11I.,  p.  909. 

386 


THE   GOLD-EXCHANGE    STANDARD 

independence  of  China — any  more  than  Belgium  reflected 
upon  the  independence  of  France  in  proposing  the  con- 
ferences which  brought  about  the  Latin  Union  in  186s.1 
The  difficulties  in  China  were  great,  growing  out  of  the 
absence  of  any  uniform  monetary  system  (or  even  the  use 
of  coined  money  in  certain  parts  of  China),  the  lack  of 
power  of  the  imperial  government  over  the  viceroys,  and 
at  first  the  opposition  of  powerful  banking  interests.  Much 
was  done  to  overcome  these  obstacles  by  Professor  Jere- 
miah W.  Jenks,  who  was  in  China  during  most  of  the  year 
1904  as  representative  of  the  American  Commission  on  In_- 
ternational  Exchange.  High  officials,  including  the  most 
progressive  of  the  viceroys,  were  convinced  of  the  wisdom 
of  the  proposed  plan.  Foreign  business  and  banking  in- 
terests, at  one  time  sceptical,  were  won  over,  and  there 
appears  to  be  no  doubt  that  China  will  eventually  aban- 
don her  isolation  as  the  only  important  country  which  is 
not  upon  a  gold  basis,  and  will  follow  her  Oriental  neigh- 
bors into  the  ranks  of  gold-exchange  countries.2 

1  Ante,  Bk.  iii.,  chap.  ii.     There  were  at  first  some  misappre- 
hensions on  this  point  in  China,  but  they  were  largely  dissipated 
by  the  American  commissioner.     Vide  also  the  memorial  of  the 
Chinese  minister  to  Russia. — Report  of  the  Commission  on  In- 
ternational Exchange,  1904,  p.  190. 

2  The  United  States  consul  at  Amoy,  George  E.  Anderson,  after 
a  careful  review  of  the  difficulties  of  establishing  a  gold-exchange 
standard  in  China  and  providing  for  a  gold  reserve  fund ,  concludes 
his  report  with  the  declaration,  "that  the  business  interests  of 
China  can  find  the  means  to  properly  establish  it  when  once  they 
go  at  the  problem  in  earnest,  I  have  not  the  least  doubt." — U.  S. 
Consular  Reports  (June,  1905),  LXXVIII.,  p.  267. 


VII 
OPERATION    OF   THE    EXCHANGE    STANDARD 

A  result  of  economic  conditions — Difficulties  in  practical  operation 
under  the  old  coinage  ratios — Relative  adaptability  of  silver 
money  in  the  Orient  and  Occident — Danger  of  excessive  issues 
of  silver — Advantages  of  the  exchange  standard  in  diminishing 
pressure  for  gold — In  restoring  stability  of  exchange — Effect 
upon  the  market  for  silver  bullion — Analogy  of  the  exchange 
standard  to  bimetallism — Its  greater  practicability. 

EVENTS  are  stronger  than  theories  in  shaping  eco- 
nomic tendencies.  The  limping  standard,  forced  by 
the  logic  of  events  upon  the  countries  of  the  Latin  Union 
and  upon  the  United  States,  while  deplored  by  many  in 
those  countries  as  an  evil,  has  contributed  to  diminish  the 
pressure  for  gold,  and  has  permitted  several  important 
states  to  obtain,  without  too  much  difficulty,  the  supply 
of  the  yellow  metal  necessary  to  the  inauguration  of  the 
gold  standard.  There  are  difficulties  about  the  operation 
of  the  limping  standard  in  the  countries  where  it  is  now 
in  force,  growing  out  of  circumstances  which  will  be  here- 
after discussed ;  but  these  difficulties  can  be  avoided  where 
the  creation  of  a  coinage  system  is  undertaken  in  the  light 
of  present  facts,  and  the  limping  standard  may  be  made 
the  effective  means  of  restoring  par  of  exchange  between 
the  countries  of  the  East  and  West,  so  long  broken  by  the 
fall  in  the  gold  price  of  silver,  and  thereby  of  forging  anew 
the  link  of  commercial  relationship  which  is  so  vital  to  the 
prosperity  of  both  hemispheres. 

The  limping  standard  as  evolved  by  events  in  France 
and  the  United  States  was  for  many  years  a  source  of 

388 


OPERATION    OF   THE    EXCHANGE    STANDARD 

anxiety  and  a  cause  of  difficulty  to  financiers.  Primarily 
the  difficulties  arose  chiefly  from  the  fact  that  the  mone- 
tary organism  was  not  based  upon  any  well-reasoned  and 
coherent  plan,  but  was  the  result  of  a  sudden  halt  upon 
the  brink  of  the  precipice  of  a  depreciated  standard.  The 
difficulties  which  thus  developed  may  be  grouped  thus: 

1.  The  great  difference  between  the  bullion  value  and 
the  face  value  of  the  token  coins. 

2.  The  lack  of  adaptability  of  the  token  coins  to  trade 
requirements  in  the  advanced  countries. 

3.  The  excess  in  supply  of  the  token  coins,  or  at  least 
the  lack  of  automatic  responsiveness  in  their  amount  to 
the  needs  of  trade. 

I.  The  difference  between  the  bullion  value  and  the  face 
value  of  the  coins  of  the  Latin  Union  and  the  United  States 
is  an  almost  insuperable  obstacle  to  the  substitution  of  a 
pure  gold  currency  for  these  coins,  and  exposes  them  to 
great  danger  of  counterfeiting.  The  coins  are  worth  only 
about  forty-five  per  cent,  of  the  value  for  which  they  pass 
in  retail  trade,  and  may  be  legally  tendered  in  payment 
of  contracts  expressed  in  money.  No  direct  loss  to 
creditors  accompanies  these  conditions,  but  a  heavy  bur- 
den is  imposed  upon  the  credit  of  the  state  in  keeping  the 
coins  at  their  face  value.  It  was  estimated  in  1898  that 
France,  if  she  had  attempted  to  convert  her  silver  coins 
into  pieces  corresponding  to  the  market-price  of  silver 
bullion,  at  the  ratio  of  35  to  i,  would  be  subjected  to  an 
expense  of  about  $235,000,000.*  Such  an  expense  has  in- 
evitably deterred  her  from  withdrawing  her  old  five-franc 
pieces  and  selling  them  for  gold.  The  profit  in  counter- 
feiting such  pieces  is  more  than  one  hundred  per  cent., 
even  when  the  counterfeits  contain  the  full  amount  of  fine 
silver  contained  in  the  official  coins.  Many  such  counter- 
feits have  been  found  in  the  United  States,  some  of  them 
containing  a  fraction  more  of  fine  silver  than  the  amount 

1  Darwin,  p.  51. 
389 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

required  by  law,  and  their  wide  distribution  has  been 
prevented  chiefly  by  the  fact  that  the  official  coins  do  not 
circulate  widely,  and  that  any  suspicious  appearance  of 
new  pieces  in  circulation  in  a  given  neighborhood  would 
quickly  attract  the  attention  of  the  agents  of  the  Secret 
Service. 

In  a  country  inaugurating  a  limping-standard  system 
under  present  conditions,  no  such  wide  departure  of  the 
bullion  value  of  the  silver  coins  from  their  face  value  need 
be  permitted  as  has  come  about  in  France  and  the  United 
States.  When  Japan  adopted  the  gold  standard  in  1897, 
the  ratio  between  gold  and  silver  was  fixed  near  the  market 
ratio  of  the  two  metals.1  This  took  away  any  unusual 
temptation  for  counterfeiting,  and  permitted  the  resump- 
tion of  gold  payments  without  disturbing  the  relation  of 
prices  and  contracts  existing  at  the  time. 

It  is  unquestionable  that  if  the  gold-exchange  standard 
is  to  be  made  applicable  to  the  conditions  encountered  in 
the  Orient,  it  must  be  by  the  recognition  of  a  new  ratio 
between  gold  and  silver  corresponding  in  some  degree  to 
the  recent  market  ratio.  The  countries  of  the  Latin 
Union  and  the  United  States,  burdened  with  many  mill- 
ions of  silver  coined  at  the  old  ratio  of  15^  to  i  and  16 
to  i,  have  to  deal  with  a  condition  whose  difficulties  they 
must  meet  in  the  best  practicable  manner;  but  the  gold- 
exchange  standard,  in  its  theoretical  application,  must 
take  some  account  of  the  market  value  of  silver,  although 
it  furnishes  means  of  guarding  against  the  fluctuations  of 
this  value. 

II.  The  lack  of  adaptability  of  large  silver  coins  to  the 
requirements  of  trade  in  the  advanced  countries  has  be- 

1  The  report  on  the  bill  declared  that  "it  would  be  well  to  raise 
the  rate  for  our  purpose  a  little,  and  fix  it  at  one  of  gold  to  thirty- 
two  and  a  fraction  of  silver" ;  but  the  actual  silver  coins  were  made 
only  eight-tenths  fine,  in  order  to  prevent  their  exportation  in  case 
of  a  rise  in  silver. — The  Adoption  of  the  Gold  Standard  in  Japan, 
p.  189. 

390 


OPERATION    OF   THE    EXCHANGE    STANDARD 

come  clear  as  wages  have  risen  and  wealth  has  increased. 
Such  a  progressive  development  causes  a  natural  evolu- 
tion from  a  cheaper  to  a  dearer  money  metal.  The 
situation  differs,  however,  in  the  undeveloped  countries  of 
the  Orient.  A  currency  which  contains  a  large  proportion 
of  gold  coins  is  better  adapted  than  a  currency  of  silver 
to  the  needs  of  a  wealthy  country ;  but  a  currency  which 
contains  a  large  proportion  of  silver  coins  is  best  adapted 
to  the  needs  of  a  poor  country.  This  is  because  the  stand- 
ard of  wages  and  prices  is  higher  in  the  rich  country  than 
in  the  poorer.  In  British  India,  China,  and  the  Philip- 
pines, where  the  wages  of  skilled  labor  are  forty  cents  a 
day  in  silver,  or  twenty  cents  in  gold,  a  currency  of  gold 
coin  would  leave  the  average  laborer  in  about  as  con- 
venient a  position  in  making  his  retail  purchases  as  Mark 
Twain  found  himself  in  with  his  million-pound  note. 

The  smallest  practical  gold  coin  represents  in  the  Orient 
the  value  of  one  dollar,  or  the  pay  of  five  days'  labor.  It 
is  obvious  that  convenience  as  well  as  necessity  would  lead 
countries  under  such  conditions  to  a  large  use  of  silver 
currency  in  preference  to  the  attempt  to  retain  and  use  a 
pure  gold  currency.  To  neglect  of  this  element  in  the 
monetary  problem  are  probably  due  some  of  the  em- 
barrassments which  were  felt  in  Japan  after  the  intro- 
duction of  the  gold  standard;  and  it  may  be  questioned 
whether  Russia  has  not  vaulted  too  far,  in  view  of  her  pres- 
ent standard  of  wages  and  national  wealth,  in  adopting 
the  gold  currency  of  her  richer  rivals,  Great  Britain  and 
Germany.1 

III.  That  France  and  the  United  States  have  suffered 


1  The  Russian  delegate  at  the  International  Conference  of  1881, 
fifteen  years  before  the  adoption  of  the  gold  standard  in  Russia, 
called  attention  to  the  fact  that  half  of  what  Russia,  Austria- 
Hungary,  and  Italy  would  require  for  the  resumption  of  specie 
payments  would  be  found  if  the  gold  pieces  equivalent  to  ten 
francs  ($2.00)  and  below  were  transformed  into  silver  pieces. 
— Russell,  p.  287. 

391 


THE    PRINCIPLES    OF    MONEY   AND    BANKING 

materially  from  their  excessive  stock  of  overvalued  silver 
coins  hardly  admits  of  serious  dispute.  In  the  United 
States  a  serious  panic  was  invoked  in  1893  by  the  large 
infusion  of  silver  into  the  currency  beyond  the  natural 
demand.  The  excess  of  silver  tended  to  expel  gold  and  to 
destroy  the  gold  basis  of  the  currency  system.  The  dif- 
ficulty was  due,  however,  to  the  fact  that  the  Secretary  of 
the  Treasury  was  required  by  law  to  purchase  silver  bull- 
ion to  the  amount  of  4,500,000  ounces  per  month,  and 
issue  circulating  notes  for  this  silver  without  regard  to  the 
need  for  cunency  in  the  markets.  The  moment  that  the 
supply  of  silver  or  silver  notes  passed  the  limits  of  the 
normal  demand,  a  progressive  deterioration  of  the  cur- 
rency set  in.  Assuming  that  the  requirement  for  currency 
was  a  constant  quantity,  every  dollar  of  new  silver  added 
to  the  circulation  tended  to  expel  a  dollar  of  gold.  This 
obviously  need  not  occur  under  proper  regulation  of  the 
output  of  token  coins  by  the  government. 

The  essential  evil  of  the  token  coinages  of  France  and 
the  United  States,  which  has  naturally  cast  discredit  upon 
their  monetary  systems,  is  that  their  token  coins  have 
been  issued  far  beyond  the  demand  for  them  in  the  chan- 
nels of  trade,  and,  therefore,  far  beyond  the  limit  of  safety. 
A  government  inaugurating  a  token  coinage  unhampered 
by  previous  conditions  would  be  able  to  take  measures  to 
check  the  output  of  token  coins  whenever  the  quantity 
threatened  to  flood  the  channels  of  the  Treasury  receipts 
or  to  impair  their  fixed  relation  to  the  standard. 

The  advantages  of  the  gold-exchange  standard,  under 
intelligent  direction,  may  be  thus  summed  up: 

1.  Diminution  of  the  pressure  upon  the  world's  supply 
of  gold. 

2.  The  maintenance  of  par  of  exchange  between  Orien- 
tal and  Western  countries. 

3.  Adaptability  to  poor  or  undeveloped  countries. 

4.  The  opening  of  markets  for  silver,  with  the  result  of 
steadying  its  value. 

392 


OPERATION    OF   THE    EXCHANGE    STANDARD 

I.  The  limping  standard  has  become  since  1873  the 
standard  of  several  of  the  leading  commercial  nations  of 
the  world.  These  nations  are  France,  Belgium,  Switzer- 
land, and  the  United  States.  The  principal  countries 
which  adhere  positively  to  the  gold  standard,  with  the  use 
of  silver  only  as  a  limited  legal  tender,  are  Great  Britain, 
Germany,  and  Russia.  These  seven  nations  represent  a 
very  large  proportion  of  the  wealth  and  commerce  of  the 
civilized  world,  and  the  influence  of  their  policies  upon  the 
stock  of  money  metals  is  necessarily  great.  Of  the  total 
gold  money  of  the  world,  they  hold  almost  precisely  four- 
fifths,  and  even  of  the  silver  money  they  hold  nearly  sixty 
per  cent.,  outside  the  great  stocks  of  China  and  India. 
The  part  which  is  played  by  gold  and  silver  in  the  monetary 
systems  of  these  seven  leading  nations  may  be  inferred 
from  the  following  estimate  from  official  sources  of  their 
stock  of  metallic  currency  on  January  i,  igoi:1 

LIMPING  STANDARD  Gold  coin  Silver  coin 

France $810,600,000  $421,200,000 

Belgium 17,800,000  35,000,000 

Switzerland 24,000,000  10,700,000 

United  States       ....  1,110800,000  655,800,000 

$1,963,200,000         $1,122,700,000 

GOLD  STANDARD 

Great  Britain        ....        $511,000,000  $116,800,000 

Germany 721,100,000  208,400,000 

Russia 724,300,000  102,500,000 

$1,956,400,000  $427,700,000 

These  figures  show  that  while  the  countries  with  a  pure 
gold  standard  are  compelled  to  make  considerable  use  of 
silver,  their  silver  stock  is  equal  to  less  than  twenty -two 

1  These  figures  are  used  rather  than  those  of  later  dates,  because 
they  bring  out  more  distinctly  the  different  status  of  the  strictly 
gold-standard  countries  and  those  under  the  limping  standard. 
Growth  in  wealth  and  resources  has  increased  the  ratio  of  gold  to 
silver  in  both  France  and  the  United  States,  and  the  latter,  since 
the  passage  of  the  Gold  Standard  Law  of  1900,  may  fairly  claim 
to  be  under  the  regime  of  the  gold  standard. 

393 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

per  cent,  of  their  gold  stock,  while  in  countries  where  the 
limping  standard  prevails  the  silver  coinage  is  equal  to 
more  than  fifty-seven  per  cent,  of  the  standard  coins  of 
gold.  If  the  continued  use  of  both  metals,  therefore,  has 
contributed  to  steadying  prices  by  maintaining  that  law  of 
compensation  in  the  relative  supply  of  the  two  metals, 
upon  which  bimetallists  so  much  rely,  it  may  be  fairly 
contended  that  the  maintenance  of  the  limping  standard 
in  these  four  representative  countries  has  obviated  the 
need  for  nearly  $700,000,000  in  gold  coin,  and  thereby 
diminished  by  that  amount  "the  scramble  for  gold  "  which 
bimetallists  consider  to  be  so  serious  a  result  of  the  general 
adoption  of  the  single  gold  standard. 

II.  The  rupture  of  the  old  par  of  exchange  between  the 
gold-standard  countries  of  the  West  and  the  silver-using 
countries  of  the  Orient  has  been  one  of  the  most  disturbing 
features  of  the  fall  in  the  value  of  silver.  It  is  correctly 
declared  by  Darwin  that  "though  it  is  possible  to  insure 
against  many  of  the  risks  which  are  thus  experienced,  the 
price  paid  for  the  insurance  constitutes  a  true  burden  on 
trade." l  The  insurance  proposed  by  the  bimetallists 
against  these  fluctuations  has  been  that  all  nations — 
whether  rich  or  poor,  whether  their  unit  of  pay  for  a  day's 
labor  was  two  dollars  or  twenty  cents — should  be  chained 
upon  the  Procrustean  bed  of  free  coinage  for  both  metals. 
A  better  insurance  is  offered  by  the  system  of  the  gold- 
exchange  standard.  The  logic  which  makes  silver  the 
most  useful  form  of  currency  in  undeveloped  countries 
points  out  the  natural  course  to  be  pursued  by  those  coun- 
tries in  adapting  their  monetary  systems  to  modern  con- 
ditions. It  is  possible  for  all  these  countries  to  adopt  the 
gold  standard,  while  retaining  silver  in  daily  use.  They 
thus  obtain  one  of  the  essential  advantages  claimed  for 
bimetallism  by  abolishing  the  fluctuations  of  exchange 
between  gold  and  silver  countries  caused  by  the  depression 

1  Bimetallism,  p.   132. 
394 


OPERATION    OF    THE    EXCHANGE    STANDARD 

of  silver,  without  drawing  heavily  upon  the  world's  stock 
of  gold. 

III.  For  undeveloped  countries  the  use  of  silver  in  large 
amounts  is  a  vital  necessity,  and  it  usually  comes  into  use, 
even  in  the  face  of  hostile  laws.  Silver  is  the  usual  me- 
dium of  exchange  in  Java,  where  a  gold  standard  exists 
with  hardly  any  gold  in  use,  and  it  is  the  medium  for  large 
transactions  in  China  and  other  parts  of  the  Orient,  even 
though  the  coins  have  to  be  sought  in  a  foreign  and  distant 
land. 

The  advantage  of  a  token  coinage  for  comparatively 
poor  or  undeveloped  countries  is  the  same  as  the  advan- 
tage of  paper  credit — it  permits  economy  of  capital.  The 
token  coins  are  less  expensive  than  coins  of  the  standard 
metal,  both  by  the  margin  between  their  face  value  and 
their  bullion  value,  and  by  the  fact  that  they  are  made 
from  the  metal  for  which  competition  is  less  severe.  A 
country  employing  a  large  volume  of  token  currency  is  not 
in  danger  of  losing  such  a  currency  by  exportation.  The 
coins  cannot  be  melted  up  for  their  face  value.  While 
they  may  have  the  character  of  gold  exchange  on  the 
country  where  they  are  issued,  they  can  only  be  converted 
into  gold  by  sending  them  back  to  that  country  when  they 
drift  abroad. 

The  maintenance  of  a  token  currency,  instead  of  one 
entirely  coined  from  the  standard  metal,  is  an  inter- 
ference to  a  limited  extent  with  the  automatic  play  of 
the  self-interest  of  individuals  which  prevails  under  free 
coinage,  but  all  coinage  systems  are  the  result  of  official 
action  taken  to  promote  the  convenience  of  the  commu- 
nity. Constant  intervention  by  the  government  is  a  part 
of  the  existence  of  any  system,  even  where  free  and  gra- 
tuitous coinage  on  private  account  is  authorized  by  law. 
The  advantage  of  a  token  currency  maintained  constantly 
at  par  with  the  standard  metal  is  that  the  government 
takes  upon  itself  the  responsibility  for  maintaining  the 
par  value  of  the  token  coins  by  means  of  a  gold  reserve, 

395 


THE    PRINCIPLES   OF    MONEY   AND    BANKING 

and  takes  the  necessary  steps  by  the  issue  of  a  loan  or  by 
taxation  to  maintain  this  reserve.  The  government  inter- 
feres with  the  law  of  natural  selection  which  would  lead  the 
individual  to  dispense  with  currency  in  order  to  obtain 
some  more  necessary  form  of  capital,  but  in  doing  so  brings 
a  real  advantage  to  the  community  by  maintaining  an 
adequate  medium  of  exchange  where  it  would  not  be  ob- 
tained under  a  system  of  free  coinage  of  the  standard 
metal  without  token  coins.  In  this,  as  in  many  other 
matters,  the  government  may  properly  intervene  to  ob- 
tain a  benefit  of  great  importance  to  the  community  as  a 
whole,  but  of  a  character  which  would  not  result  from  the 
free  play  of  self-interest  among  individuals,  and  could  not 
result  from  it  except  by  concerted  action. 

It  is  a  principle  now  generally  admitted,  that  in  order 
to  prevent  exportation  the  subsidiary  coins  of  any  coun- 
try should  not  be  of  their  full  face  value.  The  extension 
of  this  rule  to  token  coins  of  full  legal-tender  power  is 
preferable  to  going  without  an  adequate  currency,  if  the 
parity  of  such  coins  with  the  standard  can  be  made  un- 
questionable. In  spite  of  the  somewhat  artificial  nature 
of  such  a  project,  a  proper  system  of  token  coinage,  with 
adequate  provision  for  supplying  gold  for  export,  would 
operate  in  substantially  the  same  manner  as  a  coinage 
consisting  entirely  of  the  standard  metal. 

It  cannot  be  properly  said  that  such  a  well-organized 
system  of  token  coinage  involves  any  other  departure  from 
security  or  sound  monetary  principles  than  is  involved  in 
other  extensions  of  credit  designed  to  economize  the  use 
of  the  standard  metal.  The  principle  is  the  same  as  with 
the  issue  of  bank-notes  upon  a  coin  reserve,  and  involves 
the  application  of  the  same  banking  principles  in  the  reg- 
ulation of  the  quantity  of  the  currency  and  in  keeping 
intact  the  reserve  necessary  to  maintain  credit  issues 
at  an  equality  with  the  standard.  Undoubtedly,  from  a 
theoretical  point  of  view,  a  token  issue  of  credit  paper  se- 
cured by  a  proper  gold  reserve  has  most  of  the  advantages 

396 


OPERATION    OP   THE    EXCHANGE    STANDARD 

of  a  token  coinage  of  silver,  and  has  also  a  much  greater 
economy.  So  far  as  paper  is  adapted  to  economic  condi- 
tions and  popular  prejudices,  it  should  be  introduced  in 
preference  to  token  coins,  especially  for  currency  of  the 
larger  denominations. 

The  practical  problem,  however,  with  which  statesmen 
have  to  deal,  is  the  prejudice  of  the  peoples  of  the  East, 
and  many  of  those  of  the  West,  for  a  currency  of  ringing 
metal  rather  than  one  of  paper.  The  recognition  of  money 
as  a  commodity  is  instinctive  among  primitive  peoples, 
and  leads  them  to  prefer  a  form  of  money  which  possesses 
tangible  value  in  itself,  and  permits  a  more  satisfying  form 
of  ostentation  than  the  display  of  a  roll  of  bank  bills.  The 
adoption  of  a  token  coinage,  possessing  an  exchange  value 
approximating  its  bullion  value,  promises  to  be  the  most 
important  step  which  can  be  taken  in  our  time  in  educat- 
ing the  undeveloped  peoples  to  the  true  function  of  money 
and  credit,  and  the  final  evolution  of  a  bank-note  currency 
resting  upon  an  adequate  gold  reserve.  Metallic  tokens 
cannot  be  entirely  dispensed  with,  even  among  advanced 
nations.  There  are  reasons  connected  with  the  standard 
of  wages  and  living,  and  the  risks  of  destruction  by 
weather  and  insects,  which  make  them  naturally  prefer- 
able to  paper  in  certain  tropical  and  undeveloped  coun- 
tries. Where  the  bullion  value  of  the  coins,  moreover,  is 
only  slightly  below  their  face  value,  a  token  coinage  gives 
more  solidity  to  the  currency  system,  and  is  less  likely  to 
result  in  demands  for  the  standard  metal,  than  the  pre- 
mature adoption  of  the  highly  organized  gold -credit 
currency  systems  of  the  nations  of  the  West. 

IV.  Injurious  as  the  limping  standard  has  proved  in 
some  respects  to  the  monetary  interests  of  the  countries 
of  the  Latin  Union  and  the  United  States,  the  logic  of 
events  has,  perhaps,  as  already  suggested,  been  wiser  than 
abstract  theory.  If  the  single  gold  standard  had  been 
adopted  in  all  countries  in  the  form  in  which  it  prevails  in 
Great  Britain,  without  regard  to  their  scale  of  wages  and 

397 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

prices  or  their  surplus  capital  available  for  investment  in 
the  tool  of  exchange,  there  would  undoubtedly  have  been 
a  much  more  severe  pressure  upon  the  world's  supply  of 
gold  than  has  actually  been  felt.  This  pressure  would 
probably  have  drawn  the  metallic  medium  of  exchange  to 
the  richer  countries  from  the  poorer,  and  left  the  latter 
impoverished  in  their  means  of  carrying  on  transactions. 

It  would  have  caused  a  still  further  fall  in  the  value  of 
silver  by  diminishing  the  demand  for  it.  But  a  large 
market  would  be  opened  for  the  white  metal  if  the  gold- 
exchange  standard  should  be  adopted  upon  a  scientific 
basis  in  the  countries  which  are  now  without  a  currency,  or 
are  laboring  in  their  relations  with  gold  countries  under  the 
difficulties  caused  by  the  single  silver  standard.  Such  a 
system  would  be  an  almost  unlimited  blessing  to  these  less 
advanced  countries  for  many  years  to  come,  and  would 
make  their  transition  to  a  gold  currency  almost  absolutely 
automatic  if  the  scale  of  wages  and  living  increased  the 
demand  for  gold  and  checked  the  demand  for  silver.  If 
silver  gradually  fell  into  disuse  by  a  rise  in  the  scale  of 
wages  and  national  wealth,  the  suspension  of  coinage 
could  be  continued  indefinitely,  as  at  present  in  the  coun- 
tries of  the  Latin  Union,  and  all  increments  to  the  metallic 
circulation  would  be  made  thereafter  in  gold.  If,  on  the 
other  hand,  silver  should  be  in  such  demand  that  its  price 
should  approach  the  legal  parity,  and  threaten  to  rise 
above  it,  a  perfect  remedy  is  afforded  by  the  gold-exchange 
standard.  This  remedy  lies  in  the  option  of  the  debtor  to 
turn  to  gold  by  presenting  that  metal  for  coinage  at  the 
mints  and  thereby  relaxing  the  pressure  upon  the  stock  of 
silver. 

The  necessary  condition  of  such  a  system  is  govern- 
ment control  of  the  coinage.  It  is  this  which  differen- 
tiates the  gold-exchange  standard  from  free  coinage,  and 
permits  a  value  to  be  given  to  coined  money  which  is  dif- 
ferent from  its  value  as  bullion,  because  of  the  specific 
demand  for  coined  money  as  a  medium  of  exchange  and  in 

398 


OPERATION    OF   THE    EXCHANGE    STANDARD 

the  execution  of  legal-tender  contracts.  The  importance 
of  this  principle,  that  limitation  of  the  quantity  of  a  com- 
modity in  the  face  of  a  given  demand  will  raise  the  value 
of  the  commodity,  has  too  often  escaped  the  attention  of 
the  advocates  of  unlimited  issues  of  silver  and  of  govern- 
ment paper.  Just  so  much  currency  as  is  needed  for  use 
at  its  current  value  will  be  absorbed  by  the  community 
without  depreciation  in  its  value.  In  the  case  of  money, 
when  the  quantity  exceeds  this  complex  demand,  depre- 
ciation in  value  sets  in — first,  in  the  rate  paid  for  the  rental 
of  money,  which  draws  the  surplus  abroad  to  earn  higher 
returns  if  the  money  is  of  a  sort  accepted  everywhere ;  and 
second,  in  the  depreciation  of  its  exchange  value  if  the 
excessive  quantity  continues  to  confront  only  a  limited 
demand.  Government  control  of  the  tools  of  exchange 
involves  dangers  which  are  not  to  be  lightly  put  aside; 
but  under  such  a  system  as  is  here  proposed,  there  would 
be  little  temptation  to  issue  token  coins  in  excess  of  the 
demand,  because  the  profit  would  not  be  large,  and  the 
penalty  would  be  swift  in  coming,  and  glaringly  plain  to 
the  public,  in  the  flight  of  gold  and  the  imminent  risk  that 
the  par  of  exchange  would  be  broken  with  other  com- 
mercial nations. 

In  some  such  system  as  this,  which  links  silver  to  gold 
by  measuring  the  value  of  the  cheaper  metal  in  the  dearer, 
is  to  be  found  the  most  scientific  and  the  most  practicable 
solution  of  the  monetary  problems  of  the  future  in  the 
countries  which  are  being  opened  to  the  influences  of 
Western  civilization.  The  difficulties  of  wide  fluctuations 
in  exchange  are  swept  away,  or  at  least  greatly  minimized, 
without  imposing  upon  either  the  gold  or  silver  countries 
of  to-day  a  system  ill-adapted  to  their  domestic  needs.  It 
was  declared  by  the  British  Gold  and  Silver  Commission  of 
1888 :' 

"  Everything  which  hampers  complete  freedom  of  inter- 

1  United  States  Sen.  Misc.  Doc.  No.  34,  soth  Congress,  2d  Session, 
p.  84. 

399 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

course  between  two  countries,  or  which  imposes  on  it  any 
additional  burden,  is  undoubtedly  an  evil  to  be  avoided 
or  removed,  if  possible.  If,  therefore,  a  remedy  could  be 
devised  to  accomplish  this  end,  without  involving  the  risk 
of  other  disadvantages,  there  cannot  be  two  opinions  that 
it  would  be  worth  while  to  apply  such  a  remedy." 

To  this  declaration  Darwin  makes  the  addendum  that 
"Either  bimetallism  or  universal  monometallism  would, 
without  doubt,  effect  a  complete  or  almost  complete  cure, 
and  the  question  in  each  case  is  whether  the  remedy  is 
practicable,  and  whether  its  accompanying  disadvantages 
do  not  outweigh  its  undoubted  merits."1  The  "accom- 
panying disadvantages"  have  thus  far  proved  too  serious 
to  permit  the  extension  of  a  pure  gold  currency  or  of  bi- 
metallism throughout  the  world.  The  experience  of 
British  India,  and  the  plan  adopted  by  the  United  States 
for  the  Philippine  Islands,  point  the  way  for  another  solu- 
tion of  the  problem  more  in  harmony  with  local  conditions 
in  all  countries  and  with  the  historical  evolution  of  money. 
This  system  not  only  affords  a  uniform  monetary  standard 
for  foreign  trade  among  all  nations,  but  has  many  of  the 
advantages  attributed  by  its  advocates  to  bimetallism  in 
compensating  the  scarcity  of  gold  by  opening  the  reservoir 
of  the  world's  supply  of  metallic  money  to  the  steadying 
current  of  silver,  with  the  limitation,  however,  that  the 
sluice-gates  may  be  closed  if  the  new  current  threatens  to 
raise  the  common  stock  above  the  level  of  safety,  and  to 
spread  ruin  over  the  fertile  fields  of  commerce  by  driving 
the  standard  metal  from  the  reservoir  and  supplanting  it 
with  the  more  volatile. 

The  project  of  international  bimetallism  approached 
the  subject  of  regulating  the  value  of  silver  from  the  side 
of  demand.  It  did  not  undertake  to  deal  with  the  matter 
on  the  side  of  supply.  By  creating  an  unlimited  demand 
for  silver  at  a  fixed  ratio  to  gold,  through  opening  the 

1  Bimetallism,  p.  133. 
400 


OPERATION    OF   THE    EXCHANGE    STANDARD 

mints  to  free  coinage  on  private  account,  it  was  sought  to 
maintain  a  fixity  of  value  between  gold  and  silver  bullion. 
The  experiment  failed,  so  far  as  it  was  tested  in  the  coun- 
tries of  the  Latin  Union  and  in  the  United  States,  because 
the  supply  of  silver  was  in  excess  of  the  demand  at  the 
legal  ratio.  The  demand  which  was  created,  while  it  un- 
doubtedly enhanced  in  some  degree  the  value  of  silver,  by 
widening  the  market  for  it,  was  too  artificial  to  absorb  the 
product  at  its  old  gold  value  in  the  face  of  a  growing  pref- 
erence for  gold.  This  was  plainly  indicated  by  the  ac- 
cumulation of  silver  five-franc  pieces  in  the  Bank  of 
France,  when  the  option  was  open  to  any  Frenchman  to 
obtain  them  in  exchange  for  gold,  if  he  preferred  them. 

The  problem  was  approached  from  another  side — the 
side  of  regulating  the  supply — when  the  proposals  of  the 
Mexican  government  were  made  to  the  United  States,  in 
1903,  for  securing  fixity  of  exchange  between  the  moneys 
of  the  gold-standard  and  the  silver-standard  countries. 
It  was  no  longer  a  proposition  to  secure  fixity  of  value 
between  gold  and  silver  bullion,  but  between  gold  and 
silver  coins.  Therein  lay  a  marked  distinction.  It  is 
easily  within  the  scope  of  government  authority  to  reg- 
ulate the  quantity  of  silver  coin  by  providing  a  supply 
barely  up  to  the  limit  of  demand.  This  regulation  of 
supply  was  the  one  factor  lacking  to  success  under  the 
project  of  bimetallism.  If  the  governments  of  the  world 
which  desired  to  use  silver  should  keep  the  amount  of 
silver  money  in  use  just  equal  to  the  need  for  it,  and  should 
take  steps  to  keep  such  money  at  par  with  gold,  either  by 
direct  redemption  or  by  sale  of  foreign  bills  of  exchange, 
the  problem  would  be  solved  of  keeping  at  par  coins  of 
both  metals.  The  gold  price  of  silver  bullion  would  then 
be  subject  to  the  play  of  supply  and  demand  in  the  market, 
but  the  fluctuations  in  bullion  would  not  affect  the  value 
of  the  coins. 

This  policy  of  giving  a  fixed  exchange  value  to  silver 
coins  by  government  control  of  the  output  would  not  be 
i.— 26  401 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

without  influence,  moreover,  upon  the  market  value  of 
silver  bullion.  It  would  permit  countries  whose  scale  of 
transactions  was  adapted  to  silver  money  to  employ  such 
money  in  large  amounts  without  being  subject  to  the 
inconvenience  of  fluctuations  in  its  gold  value,  just  as  in 
the  advanced  commercial  countries  the  subsidiary  coins 
were  easily  maintained  at  gold  par,  and  the  public  were 
thus  guarded  against  the  inconvenience  of  having  them 
fluctuate  in  relation  to  the  standard  coin.1  An  extension 
of  the  same  principle  to  the  currency  most  used  would 
permit  a  larger  employment  of  silver  than  would  other- 
wise be  possible  with  equal  convenience,  and  would  there- 
by contribute  to  widen  its  market  and  maintain  its  price.2 

The  adoption  of  a  gold-exchange  system  of  this  charac- 
ter escapes  another  fundamental  difficulty  of  the  proposed 
bimetallic  arrangement.  This  difficulty  is  to  secure  a 
general  agreement  among  commercial  nations.  No  such 
agreement  is  necessary  to  permit  any  nation  to  issue  a 
limited  amount  of  silver  coins  and  to  keep  them  at  par 
with  its  gold  standard.  There  are  advantages  in  co- 
operation, especially  in  regard  to  the  ratio  of  weight  to 
be  adopted  between  the  gold  and  silver  coins,  but  the  dif- 
ficulties are  not  insurmountable  in  the  way  of  independent 
action  by  each  government. 

The  system  of  a  fixed  exchange  between  gold  and  silver 
coins  avoids,  therefore,  two  of  the  cardinal  difficulties  in 

1  As  Laughlin  says:  "The  circulating  medium  of  India  will  and 
must  remain  silver,  and  the  demands  of  the  people  for  silver  will 
remain  unchanged." — Bimetallism  in  the  United  States,  p.  203. 

7  The  instructions  given  by  the  government  of  Mexico  in  1903  to 
its  Commission  on  International  Exchange  declared:  "The funda- 
mental object  of  the  Commission  must  be  to  secure  the  stability 
of  the  rate  of  exchange  between  silver-standard  countries  and 
gold-standard  countries,  without  preventing  thereby  the  nations 
which  now  use  silver  coin  from  continuing  to  coin  it  or  from  con- 
suming it  in  the  same  or  larger  quantities,  provided  that  its  value 
with  relation  to  gold  becomes  fixed." — Commission  on  Interna- 
tional Exchange.  1903,  p.  165. 

402 


OPERATION    OF    THE    EXCHANGE    STANDARD 

the  project  of  international  bimetallism.  The  system  of  a 
fixed  exchange  attacks  the  problem  of  the  value  of  silver 
by  adjusting  the  quantity  of  coins  to  the  demand  for  them, 
instead  of  endeavoring  to  create  an  artificial  demand  for  an 
indefinite  supply,  and  it  permits  each  nation  to  act  for 
itself  without  the  co-operation  which  has  been  found  in 
practice,  after  repeated  efforts,  impossible  in  the  project 
of  international  bimetallism.  This  freedom  on  the  part 
of  each  nation  to  follow  its  own  policy  permits  a  more 
prompt  adaptation  of  the  monetary  system  of  each  to  the 
historical  evolution  of  its  monetary  needs.  As  set  forth 
by  the  writer  elsewhere :  * 

"This  project,  granting  to  each  government  the  right 
to  regulate  its  own  monetary  system  without  concerning 
itself  with  the  systems  of  other  nations,  has  this  important 
corollary — that  it  leaves  each  state  free  to  choose  the 
means  of  exchange  which  conform  best  to  its  local  condi- 
tions. Rich  nations  are  free  to  choose  gold,  nations  less 
rich  silver,  and  those  whose  financial  methods  are  most 
advanced  are  free  to  choose  paper.  Each  is  able  to  plant 
itself  on  the  gold  standard  and  to  maintain  the  parity  of 
foreign  exchange  by  the  methods  which  to  it  seem  the 
most  efficient." 

1  "Le  Change  entre  les  Pays  a  Etalon  d'Or  et  a  1'Etalon  d'Ar- 
gent,"  Revue  Economique  Internationale  (January,  1905),  p.  85. 


VIII 

THE  THEORY  OF  GOVERNMENT  PAPER  MONEY 

Such  money  usually  inconvertible  and  made  a  forced  legal  tender 
— From  what  sources  it  derives  its  value — Government  cannot 
create  value,  but  can  create  a  limited  demand  for  paper  money 
by  making  it  legal  means  of  payment — Limited  influence  of 
accepting  paper  for  public  dues — Why  needy  governments  are 
tempted  to  issue  paper — Unfortunate  experience  of  the  United 
States  with  the  greenbacks — Many  evils  which  flow  from  paper 
issues. 

GOVERNMENT  paper  money  consists  of  notes  issued 
by  a  government  to  circulate  as  currency.  In  order 
to  circulate  readily  such  notes  are  printed  in  uniform 
style  for  even  sums.  They  do  not  usually  bear  interest, 
although  there  have  been  cases  where  an  effort  had  been 
made  to  give  to  interest-bearing  obligations  for  small 
denominations  the  money  function.  Two  important 
attributes  have  usually  distinguished  issues  of  govern- 
ment paper  money — that  they  have  been  inconvertible 
and  have  been  made  legal  tender  for  debts. 

Inconvertibility  means  that  the  government  has  made  no 
arrangements,  or  inadequate  ones,  for  converting  such 
notes  at  the  will  of  the  holder  into  standard  money.  The 
fact  that  they  are  not  redeemed  in  such  money  on  pres- 
entation has  given  such  notes  also  the  designation  of 
irredeemable  government  paper.  While  we  shall  have 
occasion  to  speak  of  some  cases  in  which  government 
notes  have  been  made  redeemable,  the  temptation  to  issue 
them  has  usually  derived  its  force  from  the  fact  that  they 
could  be  issued  without  providing  for  redemption.  Dis- 

404 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

cussion  of  both  the  history  and  theory  of  government  notes 
has,  therefore,  been  based  upon  their  lack  of  convertibility 
into  coin  at  par  at  the  will  of  the  holder. 

The  "legal- tender  quality"  is  conferred  on  different 
forms  of  money  in  the  United  States  only  by  specific 
provisions  of  law.  In  Great  Britain,  however,  the  obliga- 
tion to  receive  money  at  its  face  value  seems  to  have  been 
assumed  for  all  the  current  moneys  of  the  kingdom  as  a 
part  of  the  common  law.  When  Henry  III.,  in  1257,  tried 
to  introduce  gold  into  the  currency,  a  writ  issued  "com- 
manding the  Mayor  of  London  to  proclaim  in  that  city 
that  the  gold  money  which  the  King  had  caused  to  be  made 
should  be  immediately  current  there  and  elsewhere  within 
the  realm  of  England  in  all  transactions  of  buying  and 
selling,  at  the  rate  of  20  pennies  of  sterlings  for  every  gold 
penny." l  In  most  modern  states  the  limits  are  defined  to 
which  the  subsidiary  coins  may  be  employed  in  making 
payments,  and  few  such  states  have  hesitated  to  give  the 
quality  of  legal  tender  to  their  own  paper  issues  and  to 
those  of  the  banks  when  war  or  economic  difficulties  have 
led  to  the  suspension  of  specie  payments.2  The  need  for 
any  legal -tender  laws  is  disputed  by  some  economists. 
Bank-notes  which  are  redeemable  in  standard  money  are 
often  not  a  compulsory  tender,  but  are  accepted  in  current 
transactions,  because  they  are  as  good  as  legal  money. 

The  fact  that  governments  have  been  able  from  time 
to  time  to  issue  paper  which  had  value  in  exchange,  even 
when  not  redeemed  in  coin  on  demand,  has  led  to  much 
confusion  of  thought  regarding  the  causes  which  give 
value  to  money.  The  essential  question,  can  government 

1  For  this  and  other  instances,  vide  S.  P.  Breckinridge,  Legal 
Tender,  p.  18,  et  seq.  By  a  statute  of  27  Edward  III.,  persons  desir- 
ing to  accept  foreign  moneys  were  permitted  to  do  so,  but  were  not 
compelled  to  against  their  will. 

1  The  French  employ  two  terms  for  legal  tender,  cours  Ugal  and 
cours  force — the  former  corresponding  to  the  legal  recognition  of 
current  metallic  money,  the  latter  plainly  recognizing  the  forced 
character  of  irredeemable  paper. 

405 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

create  value  ?  has  been  answered  in  too  broad  a  way,  both 
by  those  who  have  opposed  such  issues  on  the  one  hand 
and  by  those  who  have  looked  upon  them  as  a  magic 
means  of  creating  wealth  on  the  other  hand. 

The  value  of  money  is  derived  in  part  from  its  use  as  a 
medium  of  exchange.  It  is  in  the  power  of  a  government, 
as  it  is  in  the  power  of  an  individual,  to  give  value  to  a 
certain  extent  to  any  article  by  creating  demand  for  it.  A 
government  is  able  to  create  demand  for  articles  through 
its  position  as  consumer.  The  value  of  battle-ships  and 
cannon  would  fall  materially  if  governments  should  sud- 
denly diminish  the  demand  for  them  by  a  universal  con- 
vention to  give  up  their  use.  It  cannot  correctly  be  said, 
therefore,  that  government  has  no  power  to  confer  ex- 
change value.  Even  an  individual  has  power,  within  the 
limit  of  his  means,  to  create  demand  for  articles  having  no 
tangible  use,  as  diamonds,  autographs,  or  rare  manuscripts. 
Such  articles  derive  exchange  value  from  the  relation  of 
demand  to  supply.  The  same  principle  applies  to  paper 
money.  Government  can  create  a  demand  for  such 
money  by  special  measures;  it  can  by  other  measures 
monopolize  the  supply  and  so  concentrate  the  demand 
for  a  medium  of  exchange  upon  this  supply  as  to  compel 
private  individuals  to  employ  it  as  the  only  alternative 
to  going  without  a  medium  of  exchange.  It  is  well  said 
by  Fetter  that  "  a  sound  theory  of  paper  money  makes  it  a 
special  case  of  monopoly  value."  How  this  comes  about 
he  thus  sets  forth :  * 

"Business  conditions  remaining  unchanged,  the  limit 
of  possible  issue  without  depreciation  is  the  number  of 
units  in  circulation  before  the  paper  money  was  issued, 
the  saturation  point  of  full-weight  and  full-value  coins. 
Because  governments  generally  have  not  stopped  at  that 
point,  paper  money  has  depreciated." 

There  is  in  every  community  a  demand  for  a  medium 

1  The  Principles  of  Economics,  p.  451. 
406 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

of  exchange.  This  demand  is  met  in  communities  where  a 
metallic  currency  is  used  by  gold  and  silver  coins  and 
promises  by  responsible  institutions  to  pay  such  coins. 
When  a  government  determines  to  issue  paper  money  and 
to  make  it  legal  tender,  it  is  aided  by  the  operation  of 
Gresham's  law,  that  an  inferior  money  will  drive  out  a 
better.  Where  the  option  of  receiving  one  or  the  other 
of  two  articles  lies  with  the  person  who  is  to  receive  them, 
the  option  will  be  exercised  in  favor  of  the  better  article. 
Competition  to  obtain  the  favor  of  the  consumer  thus  tends 
to  keep  up  the  quality  of  the  articles  offered  by  shop- 
keepers. In  the  case  of  money, .if  the  option  lay  with  the 
creditor  which  money  he  should  receive,  he  would  insist 
upon  the  best.  This  condition,  however,  is  reversed  by  a 
legal-tender  law  which  gives  the  option  to  a  debtor.  Such 
a  law  confers  upon  the  debtor  the  privilege  of  paying  in 
paper  money  where  the  creditor  would  prefer  gold.  In- 
evitably under  the  operation  of  the  principle  of  self-in- 
terest, every  debtor  accepts  the  option  of  paying  in  the 
cheaper  money. 

Even  if  gold,  therefore,  remains  a  legal  tender  in  coun- 
tries where  government  paper  has  been  issued,  the  gold  will 
soon  disappear  because  it  has  a  higher  value  than  the 
paper.  Even  if  the  paper  is,  by  careful  regulation,  main- 
tained substantially  at  par  with  gold  within  the  country, 
it  will  be  found  that  it  is  not  accepted  readily  abroad. 
Gold  is  accepted  abroad,  and  is,  therefore,  used  to  pay  for 
imports  and  other  obligations  where  the  new  paper  can- 
not be  so  used.  Hence  the  gold  will  be  withdrawn  from 
circulation  for  use  abroad  and  the  vacuum  will  be  filled 
by  the  new  paper.  As  every  man  has  debts  to  pay,  which 
he  has  either  formally  contracted  for  deferred  payment  or 
by  the  cash  transactions  of  daily  life,  he  will  require  legal- 
tender  currency  to  pay  them.  Even  aside  from  the  pay- 
ment of  debts,  there  will  be  a  demand  for  the  legal-tender 
currency  for  till-money  for  merchants  and  for  meeting  de- 
mands upon  banks  for  loans. 

407 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

In  short,  the  fundamental  need  of  the  community  which 
has  given  rise  to  the  use  of  money  can  be  satisfied  only  by 
the  continued  use  of  some  substitute  for  money,  even  where 
economic  tendencies  drive  away  the  true  money  of  stand- 
ard metal.  This  entire  demand  for  money,  therefore,  in- 
cluding the  customary  demand  as  well  as  the  demand 
arising  to  fulfil  contract  obligations  previously  entered 
into,  will  absorb  government  paper  up  to  the  amount 
where  it  replaces  the  coined  money  which  has  been  pre- 
viously in  use.  Thus  a  government  which  issues  such 
paper  and  declares  by  law  that  it  shall  be  received  for 
debts  will  have  little  difficulty  in  putting  it  in  circulation 
through  the  medium  of  its  usual  disbursements.  As  the 
process  is  explained  by  Beaure: l 

"Fictitious  and  managed  money  is  sought  because  it  is 
useful  in  exchanges  and  it  is  difficult  of  acquisition  be- 
cause it  is  limited  in  quantity.  Then  also  it  is  representa- 
tive of  real  money,  being  exchangeable  for  it.  It  enters 
the  category  of  articles  which,  being  no  longer  capable  of 
reproduction,  have  by  hypothesis  a  value  which  depends 
not  upon  their  cost  of  production  (which  relates  only  to 
the  past),  but  solely  upon  demand  and  supply." 

The  acceptance  of  government  currency  at  par  for  pub- 
lic dues  is  an  element  in  giving  it  value.  The  holder  of 
government  notes  knows  that  if  the  private  individual 
will  not  take  them  as  the  equivalent  of  the  coined  money 
which  they  have  displaced,  the  government  will  do  so. 
He  can  pay  fees  for  passports  and  invoices,  he  can  pur- 
chase postage -stamps,  he  can  pay  customs  duties  and 
direct  taxes  with  the  paper  currency.  If  he  has  not  such 
payments  to  make  himself  in  large  amounts,  he  knows 
that  importers  and  others  have  them  to  make  and  that 
he  can  dispose  of  the  money  at  a  trifling  discount  to 
them.  Thus,  within  certain  limits,  the  fact  that  govern- 
ment currency  is  a  legal  tender  to  the  government,  as 

1  Thtorie  el  Pratique  de  la  Monnaie,  p.  32. 
408 


THEORY    OF    GOVERNMENT    PAPER   MONEY 

well  as  between  individuals,  aids  in  maintaining  its 
value. 

It  should  be  obvious,  however,  that  the  acceptance  of 
government  paper  for  public  dues  cannot  maintain  the 
value  of  an  amount  of  such  paper  in  excess  of  the  de- 
mand thus  created.  There  are  several  historical  instances 
where  its  value  has  been  maintained  because  the  quantity 
was  limited,  and  these  instances  have  been  misinterpreted 
by  some  as  affording  evidence  that  acceptance  for  public 
dues  will  maintain  at  par  any  quantity  of  such  paper 
issued.  Thus,  when  the  General  Court  of  Massachusetts 
enacted  in  1692  that  the  notes  of  the  province  should 
pass  in  public  payments  at  an  advance  of  five  per  cent, 
over  their  face  value,  the  notes  were  successfully  main- 
tained at  par  for  twenty  years.  But  the  amount  was  only 
£TOOO,  and  when  further  issues  were  made,  even  with 
careful  provision  for  redemption,  depreciation  of  the 
paper  set  in.1 

Another  instance,  much  quoted  by  the  advocates  of 
government  paper  money,  was  the  issue  of  demand 
treasury  notes  made  by  the  United  States  early  in  the 
Civil  War.  These  issues  fell  at  first  below  par,  and  were 
discriminated  against  at  the  banks;  but  when  they  were 
made  receivable  for  customs  dues  on  the  same  basis  as 
coin,  they  rose  to  a  premium  over  later  issues,  to  which 
no  such  privilege  was  attached.  As  they  were  cancelled 
when  thus  received,  and  greenbacks  issued  in  their  place, 
Secretary  Chase  was  able  to  report  that  the  amount 
out -standing  had  been  reduced  on  June  30,  1863,  to 
$3, 3 00,000. 2  As  gold  was  otherwise  required  for  the 
payment  of  customs  duties  and  these  notes  were  accepted 
for  the  same  purpose,  they  acquired  the  character  of  gold 
for  these  payments.  The  government  having  thus  cre- 

1  S.   P.  Breckinridge,  Legal  Tender,  p.   57. 

1  Finance  Report,  1863,  p.  45.  The  popular  impression  that 
these  notes  were  always  at  par  or  a  premium  is  shown  to  be  un.-. 
founded  by  Mjtchell,  History  of  the  Greenbacks,  pp.  149-155. 

409 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

ated  a  demand  for  the  notes  and  having  provided  a  supply 
which  was  not  in  excess  of  the  demand,  they  retained  a 
value  which  they  could  not  have  retained  if  the  supply 
had  exceeded  the  demand. 

It  is  not  an  easy  task,  however,  to  hold  up  the  value  of 
irredeemable  paper  in  coin.  It  is  an  axiom  of  mathemat- 
ics that  "things  which  are  equal  to  the  same  thing  are 
equal  to  each  other."  Paper  which  can  be  exchanged  at 
par  for  coin  is,  therefore,  equal  to  coin;  but  the  corollary 
of  this  axiom  is  that  paper  which  cannot  be  exchanged  at 
par  for  coin  is  not  equal  to  coin. 

Why,  then,  it  may  be  asked,  have  issues  of  irredeemable 
paper  ever  been  resorted  to?  The  most  obvious  answer 
is,  that  such  issues  enable  the  government  making  them 
to  obtain  capital  without  paying  for  it.  When  the  govern- 
ment of  the  United  States  in  1861  began  the  issue  of 
treasury  notes,  it  incurred  no  immediate  cost  but  that 
of  printing  the  notes.  It  was  able  to  exchange  them  for 
guns,  ammunition,  uniforms,  and  stores.  From  a  super- 
ficial point  of  view  it  might  appear  that  a  very  clever 
stroke  of  finance  had  been  achieved  in  acquiring  all  these 
things  for  the  state,  themselves  the  product  of  the  labor 
of  many  thousands  of  men  for  many  weeks,  without  any 
other  cost  to  the  government  or  the  country  than  an  act 
of  legislation  and  the  revolutions  of  the  printing-press.1 

In  most  cases  of  government  issues,  however,  it  has  not 
been  altogether  out  of  pure  wantonness — the  desire  to  get 
something  for  nothing  —  that  the  printing-presses  have 
been  set  in  operation  producing  paper  money.  It  has 
been  because  of  inability,  or  supposed  inability,  to  obtain 
resources  by  other  means  or  disinclination  to  resort  to 

i  'This  principle  seems  to  have  been  recognized  in  ancient  times. 
It  is  related  of  the  Klazomenians  that,  having  troops  to  pay,  they 
took  for  this  purpose  the  gold  of  individuals,  replacing  it  by  pieces 
of  iron  to  which  they  gave  a  value  equivalent  to  that  of  the  confis- 
cated gold.  Vide  other  instances  gathered  by  Souchon,  Theories 
jtconomiques  dans  la  Grtce  Antique,  p.  142. 

410 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

such  means.  This  was  the  case  with  the  early  issues  of  the 
American  colonies,  who  were  ill-equipped  to  invest  a  large 
capital  in  a  metallic  currency;  it  was  the  case  with  the 
assignats  issued  in  France  in  the  hope  of  averting  the 
bankruptcy  invoked  by  many  years  of  royal  extrava- 
gance, and  it  was  the  case  also  with  the  first  issues  of 
"greenbacks"  in  the  American  Civil  War.  In  the  latter 
case,  it  was  possible  to  have  averted  the  issue  of  govern- 
ment paper  by  prompt  resort  to  the  powers  of  taxation ; 
but  such  steps  were  so  long  delayed  as  to  justify  in  a 
measure  Charles  Sumner's  declaration: 

"Whatever  may  be  the  national  resources,  they  are  not 
now  within  reach,  except  by  summary  process.  Reluc- 
tantly, painfully,  I  consent  that  the  process  should  issue." 

This  passage  rightly  defines  the  manner  in  which  the 
government  took  capital  from  its  citizens  by  the  legal- 
tender  acts.  It  hints,  however,  at  a  deeper  economic 
motive  for  such  action — a  motive  which  has  been  general- 
ly overlooked  in  the  discussion  of  the  subject,  but  which 
serves  as  a  partial  set-off  (though  a  very  incomplete  one) 
for  the  evils  which  government  paper  has  caused.  This 
was  the  temporary  saving  of  capital  to  the  country.  If 
the  payment  of  legal  -  tender  notes  to  soldiers  and  con- 
tractors had  been  simply  a  taking  by  the  government  for 
its  own  purposes  of  the  products  of  American  laborers  and 
manufacturers,  the  country  would  not  have  been  the 
gainer.  But  there  was  another  principle  involved,  which 
affected  the  country  as  a  whole  to  substantially  the  same 
extent.  This  lay  in  the  fact  that  the  country  as  an 
economic  unit  was  enabled  to  acquire  from  abroad  the 
control  of  an  amount  of  capital  or  goods  representing 
approximately  the  amount  of  the  new  currency  issued. 
No  foreigner  would  accept  the  new  currency  in  payment 
for  his  labor  or  its  products,  but  the  country  was  enabled 
to  substitute  for  its  existing  currency,  consisting  of  stand- 
ard metal,  a  new  currency  of  paper,  and  to  pay  for  im- 
ported goods  by  the  exportation  of  gold,  which  would 

411 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

otherwise  have  had  to  be  paid  for  by  the  exportation  of 
other  goods. 

It  is  an  important  principle  of  economics  that  the  em- 
ployment of  paper  substitutes  for  metallic  money  tends 
to  afford  a  means  of  drawing  capital  into  use  which  would 
otherwise  have  remained  idle.  While  this  principle  is  not 
ordinarily  so  applicable  to  issues  of  government  paper  as 
to  bank-notes — because  the  former  do  not  grow  out  of 
normal  commercial  transaction — yet  in  a  time  of  unusual 
need  for  supplies  by  the  government,  such  as  occurred 
during  the  Civil  War,  the  issue  of  such  paper,  by  increasing 
the  immediate  resources  of  the  state,  may  have  contrib- 
uted to  keep  capital  at  home  and  to  substitute  gold  for  it 
in  the  settlement  of  obligations  incurred  abroad.  In  this 
sense  the  appropriation  by  the  state  of  an  equivalent 
amount  of  the  capital  of  the  people  was  a  justification  of 
the  argument  of  Dubois,  that  the  mercantilists  were  not 
entirely  wrong  in  preoccupying  themselves  with  the 
formation  of  a  war  chest,  and  that  the  early  expenses  of  a 
campaign  require  great  sums  to  be  immediately  available.1 
Under  ordinary  circumstances,  it  is  undoubtedly  true 
(with  some  qualification),  as  laid  down  by  Walras,  that:2 

"The  increase  in  the  quantity  of  (available)  capital 
permitted  by  an  issue  of  bank-notes  consists  in  an  in- 
crease, not  in  the  quantity  of  circulating  capital,  but  in 
that  of  fixed  capital." 

Under  normal  conditions,  the  quantity  of  circulating 
capital  which  a  country  requires  does  not  differ  widely 
enough  from  time  to  time  to  prevent  new  savings  from 
being  added  for  the  most  part  to  the  stock  of  fixed  capital 
in  the  form  of  tools,  investments  in  machinery,  and  build- 
ings. This  would  be  the  natural  effect  of  the  issue  of 
irredeemable  paper  in  large  amount  and  the  consequent 
expulsion  of  a  gold  currency  in  time  of  peace.  In  time  of 
war,  however,  when  a  large  number  of  persons  are  with- 

1  Precis  de  l^Histoire  des  Doctrines  Economiques,  I.,  p.  265. 
'Etudes  d' Economic  Politique  Applique,  p.  362. 

412 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

drawn  from  the  ranks  of  producers  to  become  consumers 
only  (as  soldiers),  it  may  be  questioned  whether  nearly 
all  the  capital,  fixed  or  circulating,  which  is  capable  of 
such  conversion,  is  not  put  into  consumable  goods  like 
rations,  uniforms,  and  ammunition. 

If  this  is  so,  it  explains  in  some  degree  the  latent  ten- 
dency to  seize  upon  the  metallic  currency  as  a  war  resource. 
That  this  was  the  real  economic  tendency  of  the  green- 
back issues — to  concentrate  the  producing  capacity  and 
economic  energy  of  the  country  upon  the  equipment  of  its 
armies  at  home — is  borne  out  to  a  rather  remarkable 
degree  by  the  statistics  of  foreign  trade.  They  show  a 
falling  off  in  exports  of  merchandise  from  an  annual 
average  of  about  $273,000,000  for  the  five  years  ending 
with  1860  to  about  $187,000,000  for  the  five  years  ending 
with  I865.1  Home  production  was  thus  diverted  to  home 
consumption.  The  metallic  currency  was  treated  in  ef- 
fect as  a  reserve  fund  which  was  seized  upon  by  the 
government  for  the  emergencies  of  war.  It  was  a  process 
of  a  similar  nature  to  that  which  led  the  Greek  commanders 
to  strip  the  temples  of  their  treasures  in  the  internal  wars 
of  Greece,  or  which  has  led  patriotic  subjects  to  despoil 
the  churches  of  their  gold  and  silver  ornaments  in  times 
of  national  stress. 

Up  to  the  point  that  the  amount  of  paper  issued  by  the 
government  did  not  exceed  the  amount  of  metallic  cur- 
rency driven  from  circulation,  the  community  as  well  as 
the  state  profited  in  a  narrow  sense  by  the  economy  of 
the  capital  previously  invested  in  gold.  Gold  had  a 
world  market.  It  was  the  most  negotiable  thing  with 

1  The  figures  of  imports  are  also  striking.  They  fell  from 
$353,616,119  in  1860  to  a  minimum  of  $189,356,677  in  1862, 
but  recovered  to  an  annual  average  of  about  $266,000,000  for 
the  next  three  years.  The  outward  movement  of  gold  seems  to 
have  been  delayed  until  the  year  beginning  July  i,  1863,  but 
reached  a  net  amount  of  over  $200,000,000  within  the  next  three 
years. 

413 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

which  the  United  States  could  settle  their  obligations 
abroad.  Hence,  as  Mitchell  points  out:1 

"Gold  really  became  redundant  in  the  United  States 
when  it  had  been  withdrawn  from  current  circulation  as 
money,  and  when  bankers  were  asked  for  exchange  they 
could  'find  no  commodity  so  cheap  as  gold  to  ship  and 
draw  against.'" 

When  all  the  metallic  currency  had  been  driven  abroad, 
however,  and  the  government  made  additional  issues  of 
paper,  the  community  as  such  ceased  to  profit.  The 
government  took  from  its  own  citizens  the  products  of 
their  labor  and  forced  them  to  accept  in  payment  its  paper 
promises.  Unfortunately,  this  has  been  the  usual  history 
of  government  paper  money.  The  necessity  found  in 
weak  financial  resources  for  issuing  it  in  the  first  place 
has  become  a  more  imperative  reason  for  continuing  to 
issue  it.  The  government  which,  at  the  beginning  of  war, 
could  convince  lenders  of  money  at  home  and  abroad  that 
it  would  avail  itself  of  the  gold  currency  only  to  the  extent 
of  substituting  paper  for  a  part  of  it,  keeping  such  paper 
constantly  at  par  and  obtaining  its  chief  resources  from 
loans  and  taxation,  might  accomplish  some  small  degree  of 
economy  by  its  paper  issues.  But  in  the  nature  of  the 
case,  it  would  be  extremely  difficult  to  give  convincing 
pledges  that  the  issue  of  paper,  when  once  entered  upon, 
would  not  be  repeated  and  continued  until  gold  had  been 
driven  from  the  country,  paper  had  depreciated  until  it 
was  the  sole  standard  of  value,  and  the  national  finances 
had  become  so  deranged  that  public  credit  was  seriously 
impaired.  The  government  strong  enough  to  adopt  a 
sound  policy  with  success  would  be  strong  enough  to  do 
without  legal -tender  paper  at  all,  so  that  for  practical 

1  This  fact  is  used  also  to  prove  that  the  price  of  gold  was  not 
artificially  enhanced  by  "  speculation,"  as  claimed  by  some  of  the 
paper-money  men,  because  in  that  case  exports  of  gold  would  have 
been  checked  and  imports  of  the  metal  have  begun. — History  of 
the  Greenbacks,  p.  191. 

414 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

purposes  it  may  be  said  that  the  government  which  enters 
upon  the  policy  of  issuing  government  paper  to  meet  an 
emergency  forfeits  confidence  in  its  purpose  and  its  ability 
to  continuously  fulfil  its  obligations. 

It  has  been  the  usual  history  of  government  paper  that 
the  first  issue  has  been  made  reluctantly  and  under  solemn 
pledges  that  it  should  not  be  increased,  but  that  such 
pledges,  when  a  new  emergency  arose,  have  been  treated 
lightly  as  "dicers'  oaths."  Such  was  the  history  of  the 
legal -tender  act  of  1862  in  the  United  States.  When 
Secretary  Chase  submitted  his  annual  report  to  Congress 
in  1 86 1,  he  discussed  the  project  of  issuing  government 
paper,  but  declared  that  its  possible  consequences  were:1 

"The  temptation,  especially  great  in  times  of  pressure 
and  danger,  to  issue  notes  without  adequate  provision  for 
redemption;  the  ever-present  liability  to  be  called  on  for 
redemption  beyond  means,  however  carefully  provided 
and  managed;  the  hazard  of  panics,  precipitating  de- 
mands for  coin,  concentrated  on  a  few  points  and  a  single 
fund;  the  risk  of  a  depreciated,  and  depreciating,  and 
finally  worthless  paper  money ;  the  immeasurable  evils  of 
dishonored  public  faith  and  national  bankruptcy." 

These  possible  disasters,  Chase  declared,  so  far  out- 
weighed the  probable  benefits  of  the  plan,  that  he  felt  him- 
self constrained  to  forbear  recommending  its  adoption. 
Yet  within  four  weeks  after  the  meeting  of  Congress  a  bill 
had  been  introduced  by  the  chairman  of  the  sub -com- 
mittee charged  with  the  subject,3  providing  that  "for 
temporary  purposes,"  and  until  a  banking  law  could  be 
put  in  operation,  legal -tender  notes  should  be  issued  to  the 
amount  of  $50,000,000.  To  this  measure  Chase  gave  his 

1  Spaulding,  p.   10. 

1  This  was  Representative  E.  G.  Spaulding,  of  Buffalo,  author 
of  a  work  on  the  history  of  the  legal-tender  paper,  of  whom  Sumner 
sarcastically  observes  that  he  "claims  to  have  been  the  author  of 
this  act,  and  no  counter-claimant  has  ever  arisen." — A  History 
of  American  Currency,  p.  198. 

415 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

reluctant  assent.1  Warnings  that  the  first  issue  would 
lead  to  others  passed  unheeded  over  the  heads  of  members 
who  preferred  issuing  fiat  paper  to  testing  the  merits  of 
heavy  taxation.2  Before  the  bill  became  law,  the  limit 
of  issues  had  been  raised  to  $150,000,000,  and  other  issues 
soon  came.  The  first  act  became  law  February  25,  1862. 
On  June  7,  1862,  Secretary  Chase  was  writing  to  the 
Committee  on  Ways  and  Means,  asking  for  more  notes. 
The  authority  to  issue  them  was  granted,  to  the  amount 
of  $150,000,000.  Descent  of  the  path  of  irredeemable 
paper  became  easier  with  each  step.  In  January,  1863,  a 
bill  providing  for  $100,000,000  more  notes  was  introduced, 
passed  both  houses  of  Congress,  and  received  the  approval 
of  President  Lincoln,  all  within  three  days.3  This  issue 
was  only  part  of  a  larger  one  which  was  coupled  with  a 
restriction  on  the  issue  of  small  bank-notes. 

From  the  suspension  of  specie  payments  by  the  banks 
at  the  close  of  1861,  a  premium  on  gold  appeared,  but  it 
did  not  rise  above  three  per  cent,  until  May,  1862.  After 
that  the  premium  rose  rapidly.  The  price  of  gold  in 
currency  was  115^  at  the  beginning  of  August,  122  f  early 
in  October,  and  13  2  J  at  the  close  of  December,  1862. 
Within  the  next  two  months  it  was  as  high  as  172.  Im- 
porters bought  gold  not  merely  for  the  payment  of  cus- 
toms duties,  which  were  still  exacted  in  gold,  and  for 
direct  payments  to  foreigners,  but  also  for  protection 
against  fluctuations  in  the  value  of  the  currency  between 
the  times  goods  were  bought  and  sold.  Exporters  bought 
and  sold  for  similar  reasons,  and  even  manufacturers  and 
merchants  in  domestic  trade  sought  in  the  same  manner  to 
protect  themselves  on  their  future  contracts  expressed  in 

1  Letter  of  January  22,  1862. — Spaulding,  p.  27. 

*Vide  Mitchell,  p.  57. 

'The  original  bill  called  for  $50,000,000;  but  on  Lovejoy's  mo- 
tion the  amount  was  doubled.  "Then,"  says  Mitchell,  "without 
any  discussion  the  resolution  was  passed." — History  of  the  Green- 
backs, p.  109. 

416 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

paper  currency.  Thus  men  of  foresight  obtained  the 
advantage  they  usually  obtain  in  times  of  uncertainty  and 
speculation  over  those  who  drift  with  the  current.1  While 
wages  rose  eventually  in  paper,  prices  rose  much  faster. 
In  1863,  according  to  a  careful  investigation,  prices,  in 
comparison  with  a  basis  of  100  in  1860,  stood  at  148.6; 
wages  had  risen  only  to  110.5.  In  1864  prices  stood  at 
190.5,  wages  at  125.6.  Some  of  the  effects  of  these  condi- 
tions are  thus  summed  up  by  Dewey : 2 

"As  the  purchasing  power  of  earnings  was  greatly 
diminished  a  heavy  load  was  placed  upon  the  laborers 
of  the  country.  The  government  was  the  largest  em- 
ployer of  labor  in  workmen,  clerks  and  soldiers;  but  the 
government  rarely  makes  changes  in  its  salaries  or  pay, 
and  hence  did  not  feel  the  full  effect  of  the  increase  in 
wages  which  took  place  in  the  individual  field  of  labor." 

Even  the  benefits  of  disposing  of  the  gold  currency 
abroad  were  transitory  and  were  more  than  offset  by  the 
bad  effect  of  the  paper  issues  on  our  international  credit. 
It  became  necessary  to  raise  at  home  all  the  capital  re- 
quired for  carrying  on  the  war,  instead  of  borrowing  a 
part,  to  be  repaid  when  the  country  was  not  under  such 
stress.  The  effect  of  this  policy  abroad  was  incidentally 
political  as  well  as  financial.  As  Bagehot  points  out:3 

"The  old  countries  were  frightened  by  the  probable 
issue  of  unlimited  inconvertible  paper,  and  they  would 
not  lend  a  shilling.  Much  more  than  the  mercantile  credit 
of  America  was  thus  lost.  The  great  commercial  houses 
in  England  are  the  most  natural  and  most  effectual  con- 
veyers of  intelligence  from  other  countries  to  Europe:  if 

1  Sim  on  Newcomb  declares:  "A  system  of  paper  money  may  be 
described,  in  general,  as  a  convenient  device  for  throwing  the  entire 
burden  of  an  extraordinary  expense  upon  that  class  of  the  community 
who  have  most  faith  in  the  paper  money." — Financial  Policy  during 
the  Southern  Rebellion,  p.  114. 

J  Financial  History  of  the  United  States,  p.  294. 

1  The  English  Constitution,  Works,  IV.,  p.  46. 
i.-»7  417 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

they  had  been  financially  interested  in  giving  in  a  sound 
report  as  to  the  progress  of  the  war,  a  sound  report  we 
should  have  had.  But  as  the  Northern  States  raised  no 
loans  in  Lombard  Street  (and  could  raise  none  because 
of  their  vicious  paper  money)  Lombard  Street  did  not  care 
about  them,  and  England  was  very  imperfectly  informed 
of  the  progress  of  the  civil  struggle." 

Nor  was  this  incident  peculiar  to  this  particular  case. 
The  government  which  issues  irredeemable  paper  either 
separates  itself  absolutely  from  the  international  money 
market  or  condemns  itself  to  paying  there  a  high  premium 
for  the  lack  of  confidence  which  its  own  policy  has  aroused. 
If  Japan  in  1904,  instead  of  jealously  guarding  her  gold 
reserve  and  applying  to  its  restoration  the  proceeds  of  her 
first  foreign  loan,  had  issued  paper  money,  she  might, 
indeed,  have  obtained  financial  aid  in  London  in  the  form 
of  loans,  but  it  would  have  been  upon  the  onerous  terms 
upon  which  it  has  been  granted  to  backward  peoples  of 
uncertain  credit  and  disordered  finances. 

Upon  the  whole,  therefore,  the  issue  of  paper  money 
is  a  resource  which  can  seldom,  if  ever,  be  availed  of  to 
advantage  in  meeting  emergencies.  Governments  which 
enter  upon  the  issue  of  paper  money  rarely  restrain  the 
amount  within  the  limits  of  the  stock  of  metallic  money 
which  is  displaced.  Every  new  issue,  if  it  adds  to  the 
amount  legitimately  required  to  take  the  place  of  coin, 
by  this  very  fact  separates  the  value  of  the  paper  further 
from  that  of  gold.  This  rise  of  the  gold  premium  in  its 
turn  accentuates  distrust  of  the  paper,  sends  its  gold  value 
still  lower,  and  causes  a  demand  for  increased  issues.  The 
actual  course  of  events  has  verified  the  summary  made  by 
Schwab  in  reference  to  the  Confederate  paper  of  the  Civil 
War:1 

"  The  paradox  that  a  further  redundancy  of  notes  would 
create  a  still  greater  scarcity  by  driving  prices  still  higher 

1  The  Confederate  States  of  America,  p.  147. 
418 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

and  putting  commodities  still  further  beyond  the  reach 
of  the  note-holder,  was  seldom  understood.  'The  busi- 
ness wants  of  the  country'  were  never  satisfied,  and  were 
calling  for  more  notes  during  the  inflation  of  the  Con- 
federacy, just  as  they  were  in  the  North  at  the  same  time, 
and  as  they  always  had  done  in  former  periods  of  sus- 
pension in  our  history.  Under  similar  conditions  the 
pressure  for  more  currency  was  always  inevitable  and 
generally  irresistible. 

"The  history  of  the  French  assignats  offers  an  instruc- 
tive parallel.  We  hear  constant  complaints  of  a  lack  of  a 
circulating  medium  and  a  clamor  for  more  notes,  especially 
of  small  denomination.  Exactly  the  same  cry  was  raised 
in  Austria  during  the  fifties  and  in  Russia  during  the  next 
decade.  It  is  always  the  same  story :  as  the  irredeemable 
paper  drives  up  prices,  the  public  demands,  and  generally 
gets,  more  notes  with  which  to  meet  this  higher  price 
level." 

Thus,  the  general  tendency  of  government  paper  issues 
is  to  create  "a  vicious  circle,"  by  affording  a  tempting 
means  for  meeting  demands  for  increased  issues  while  af- 
fording no  means  of  curtailing  them  when  they  have  be- 
come obviously  excessive.  If  it  were  possible  to  regulate 
the  stock  of  paper  money  automatically,  so  that  it  would 
in  fact  respond  to  'the  demands  of  trade,  while  confidence 
in  the  issuing  power  remained  unimpaired,  it  might  be 
possible  in  theory  to  keep  government  paper  currency 
near  the  level  of  its  declared  value  in  coin.  Thus  far  in 
monetary  experience,  however,  the  only  practicable 
means  of  doing  so  has  been  found  to  consist  in  direct 
redemption  at  par  in  coin.  Rarely  have  governments 
been  able  to  maintain  such  redemption  at  the  time  of 
issuing  government  paper,  and  in  many  cases  they  have 
not  even  sought  to  maintain  it. 

In  some  of  those  communities  which  have  gotten  be- 
yond the  struggle  for  bare  economic  existence  and  have 
learned  the  lesson  of  disaster  taught  by  excessive  issues 

419 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

of  paper,  a  moderate  policy  has  in  recent  years  been 
adopted  which  has  guarded  against  some  of  the  chief 
dangers  of  such  issues.  If  such  paper  is  to  be  issued 
without  grave  risk,  it  should  form  only  a  small  proportion 
of  the  total  circulation,  leaving  a  large  vacuum  for  money 
of  the  standard  metal.  Within  such  limits  government 
paper,  when  redeemable  on  demand,  forms  a  substratum 
upon  which  the  more  elastic  element  of  the  metallic  cur- 
rency may  be  superimposed.  This  has  become  by  the 
progress  of  events  the  practical  character  of  the  use  of 
paper  in  the  monetary  systems  of  the  United  States  and 
Canada  in  recent  years. 

In  the  United  States  the  $346,681,016  in  greenbacks, 
left  outstanding  by  the  law  of  May  28,  1878,  has  not  been 
increased.  The  total  stock  of  currency  in  the  country  ex- 
panded from  $789,790,976  at  that  time  to  $2,885,079,229 
on  July  i,  1905.  If  there  had  been  no  other  paper  issues 
or  token  currency  infused  into  the  circulation  in  the  mean- 
time, the  increase  would  have  been  in  the  form  of  the 
standard  metal.  The  greenbacks  would  then  have  con- 
stituted only  about  one-eighth  of  the  total  stock  and 
would  have  formed  no  menace  to  the  integrity  of  the 
currency  system.  In  Canada  the  principle  of  maintaining 
a  limited  issue  of  government  paper  as  an  economy  to  the 
government  and  the  community  has  resulted  in  the  issue 
of  what  are  called  " Dominion  notes"  in  denominations  of 
$i,  $2,  and  $4.  Against  such  issues  up  to  the  amount  of 
$30,000,000,  a  reserve  of  fifteen  per  cent,  in  gold  is  re- 
quired, while  beyond  this  limit  the  notes  must  be  fully 
covered  by  gold,  making  them  substantially  gold  certifi- 
cates. As  the  banks  are  required  to  keep  half  their  re- 
serves in  Dominion  notes  and  their  circulation  has  greatly 
increased  in  recent  years,  the  joint  demand  from  the  banks 
and  for  small  notes  in  circulation  has  accumulated  a  large 
gold  fund  in  the  Dominion  Treasury.1  In  Austria,  how- 

1  The  amount  of  this  fund  at  the  close  of  1904  was  $35,906,822, 
an  increase  of  about  twenty-five  per  cent,  in  a  single  year,  indicat- 

420 


THEORY    OF    GOVERNMENT    PAPER    MONEY 

2ver,  the  issues  of  government  notes  made  in  times  of 
stress,  in  spite  of  the  fact  that  they  were  materially  re- 
duced, proved  a  clog  to  the  resumption  of  specie  payments 
by  the  national  bank  until  in  1902  they  were  practically 
all  retired.1  Their  history  demonstrates  how  difficult 
is  the  maintenance  of  a  government  paper  issue  except 
by  the  strongest  governments,  on  the  most  limited  scale, 
and  under  the  most  severe  regulations. 

ing  a  note  circulation  of  about  $61,000,000. — Money  and  Risks 
(February,  1905),  XII.,  p.  66. 
1  Vide  Raffalovich,  Le  Marche  Financier  en  1902-03,  p.  820. 


IX 

HOW  THE  VALUE  OF  GOVERNMENT  PAPER  IS 
DETERMINED 

Not  subject  directly  to  the  international  movements  of  gold — In- 
fluence of  the  principle  of  demand  and  supply — Factors  which 
affect  demand — Confidence  in  redemption  at  par — Fluctuations 
of  the  greenbacks  during  the  Civil  War — Influence  of  the  foreign 
exchanges — Experiences  of  Brazil  and  the  Argentine  Republic 
— Effect  of  depreciated  paper  on  prices  and  exports — Govern- 
ments not  fitted  to  regulate  and  maintain  the  paper  currency. 

EXPERIENCE  has  shown  that  the  value  of  irre- 
deemable paper  money  is  subject  to  violent  fluctua- 
tions. It  does  not  escape  the  influence  of  the  principle  of 
supply  and  demand,  which  affects  the  value  of  a  gold  cur- 
rency or  one  redeemable  in  gold,  but  both  supply  and 
demand  are  subject  to  special  influences  which  greatly 
widen  the  range  of  fluctuations  to  which  a  redeemable 
currency  is  subject. 

The  essential  principle  which  should  regulate  a  govern- 
ment paper  currency,  not  directly  redeemable,  but  in- 
tended to  be  kept  at  par  with  gold,  is  that  supply  should 
be  kept  within  the  limits  of  demand.  In  countries  having 
a  metallic  standard  the  variations  of  demand  for  currency 
are  met  by  the  ebb  and  flow  of  the  standard  metal  under 
the  influence  of  changes  in  the  discount  rate  at  the  banks. 
This  ebb  and  flow  of  the  standard  metal  cannot  be  count- 
ed upon  in  a  country  having  a  currency  exclusively  of 
government  paper  or  tokens.  Recourse  must  be  had, 
therefore,  in  endeavoring  to  regulate  the  value  of  irre- 

422 


THE  VALUE  OF  GOVERNMENT  PAPER 

deemable  paper,  to  various  external  indications  of  its 
metallic  value  and  means  of  influencing  this  value. 

If  the  quantity  of  money  required  by  a  country  were 
always  the  same  and  could  be  ascertained,  either  statis- 
tically or  by  the  automatic  operation  of  economic  law, 
government  paper  money  issued  to  just  this  amount  might 
retain  nearly  its  nominal  value.  The  fact  that  the  de- 
mand for  money  varies,  however,  introduces  an  element 
of  fluctuation  into  the  exchange  value  of  government 
paper  greater  than  that  which  occurs  with  coined  money. 
There  are  several  reasons  for  this.  In  the  first  place,  even 
if  confidence  prevailed  generally  in  the  character  of  the 
government  paper  and  its  issuer,  there  would  be  no 
efficient  means  of  adjusting  the  quantity  accurately  to 
the  demands  of  trade.  Such  an  adjustment  comes  about 
automatically  with  a  gold  currency  by  the  exportation  of 
the  surplus  when  money  is  too  abundant,  and  importation 
to  fill  the  void  when  the  stock  of  money  is  deficient.  But 
as  government  paper  money  is  not  exportable,  there  is  no 
remedy  for  an  excess  of  it  in  the  absence  of  provision  for 
redemption.  The  result  is  that  under  such  circumstances 
the  supply  of  money  becomes  excessive  and  this  excess 
tends  to  reduce  its  value.  The  surplus  accumulates  in 
the  banks.  The  banks  have  no  means  of  getting  rid  of  it 
except  by  loans  and  advances,  and  by  making  loans  and 
advances  at  low  rates  of  interest  they  tend  to  foster 
speculation  and  to  raise  prices. 

Some  other  rule  must,  therefore,  be  applied  to  the  cur- 
rency to  keep  it  within  the  limits  of  commercial  require- 
ments. The  essential  tests  which  have  been  thus  applied 
have  been  the  promise  of  redemption  in  the  future,  limita- 
tion of  the  quantity,  and  regulation  by  the  foreign  ex- 
changes. 

A  paper  currency  which  is  redeemable  on  demand  is 
ordinarily  at  par  with  the  metallic  standard.  Its  value 
cannot  depart  far  from  that  of  the  metal  for  which  it  is 
freely  exchangeable.  It  is  paper  currency  which  is  not 

423 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

redeemable  with  which  the  economist  and  statesman  have 
usually  to  deal,  however,  and  the  question  what  influences 
operate  upon  its  exchange  value  in  gold  is  intricate  and 
many-sided.  We  have  already  seen  that  the  principle 
upon  which  its  value  rests  is  that  of  monopoly  supply — 
the  control  by  government  of  the  quantity  of  the  instru- 
ments of  exchange  which  are  daily  required  in  the  busi- 
ness transactions  of  the  people.  If  the  government  is 
parsimonious  in  supplying  the  instruments  of  exchange, 
the  value  of  the  unit  will  be  higher  than  if  the  govern- 
ment is  generous  in  their  distribution.  In  a  broad  sense 
the  principle  is  sound  which  is  laid  down  by  Sumner: l 

"The  whole  story  which  precedes  goes  to  show  that 
the  value  of  a  paper  currency  depends  on  its  amount.  At 
the  time  of  issue,  or  during  a  war  in  which  the  issuer  is 
engaged,  it  depends  in  some  degree  on  his  credit ;  but  when 
it  settles  down  in  peace  as  the  normal  medium  of  exchange 
its  value  comes  to  depend  almost  purely  on  its  amount. 
This  amount,  of  course,  is  relative  to  the  requirements  of 
the  country  for  the  purpose  of  performing  its  exchanges. 
What  the  requirement  is,  however,  no  man  can  tell." 

This  rule  is  what  may  be  described  as  the  static  rule 
of  the  value  of  inconvertible  paper.  The  dynamic  rules 
are  more  varied  and  perplexing  in  their  operation,  and 
often  so  far  obscure  the  operation  of  the  static  rule  as  to 
entirely  counteract  its  influence.  In  regard  to  incon- 
vertible paper,  the  caution  is  perhaps  even  more  important 
than  in  regard  to  gold — that  quantity  is  only  one  of  many 

1  A  History  of  American  Currency,  p.  221.  The  rule  is  stated 
even  more  graphically  by  Marx:  "  How  many  reams  of  paper  cut 
up  into  bills  can  circulate  as  money  ?  Put  in  that  way,  the  ques- 
tion would  be  absurd.  The  worthless  tokens  are  signs  of  value 
only  in  so  far  as  they  represent  gold  within  the  sphere  of  circula- 
tion, and  they  represent  it  only  to  the  extent  to  which  it  would 
itself  be  absorbed  as  coin  by  the  process  of  circulation;  this  quan- 
tity is  determined  by  its  own  value,  the  exchange  values  of  the 
commodities  and  the  rapidity  of  their  metamorphoses  being  given." 
— A  Contribution  to  the  Critique  of  Political  Economy,  p.  155. 

424 


THE  VALUE  OF  GOVERNMENT  PAPER 

influences  affecting  its  relation  to  goods.  The  other  in- 
fluences, moreover,  which  may  act  upon  the  value  of  paper 
are  often  much  more  violent  in  their  effects  than  any 
which  can  operate  upon  the  value  of  gold.  Impairment 
of  credit  enhances  the  value  of  gold;  it  may  depress  the 
value  of  inconvertible  paper.  Changes  in  the  value  of 
gold,  moreover,  within  a  single  community  are  mitigated 
in  their  ultimate  effects  by  the  resistance  of  the  gold  stock 
of  the  world ;  changes  in  the  value  of  inconvertible  paper 
may  have  their  violent  ups  and  downs,  influenced  only 
slightly  and  indirectly  by  the  movement  of  gold  in  the 
world's  markets.  Among  the  influences  thus  operating 
on  the  value  of  paper  are  cited  by  a  careful  student : l 

"The  momentary  credit  of  the  government,  the  course 
of  military  events,  the  policy  of  the  banks,  the  export  of 
specie,  the  demand  for  gold  from  importers,  the  probabil- 
ity of  fresh  issues  of  legal-tender  paper,  treasury  sales  of 
gold,  speculative  manipulation  of  the  markets,  the  chance 
of  resumption  of  specie  payments." 

Most  of  these  factors,  though  not  all — depend  upon  the 
degree  of  confidence  of  holders  of  paper  in  its  ultimate  re- 
demption. Changes  of  opinion  on  this  subject  cause 
fluctuations  in  the  value  of  paper,  without  changes  in  any 
visible  and  material  factors  which  might  affect  its  value. 
Such  changes  of  opinion,  due  to  military  and  political 
events  or  even  to  psychological  moods,  are  not  subject  to 
calculation  by  any  mathematical  rule.  They  introduce 
an  element  of  speculation  into  the  value  of  paper  money 
which  cannot  well  enter  into  the  value  of  gold  or  of  notes 
redeemable  in  gold.  Even  bank-notes  are  subject  to  this 
influence  when  irredeemable,  as  in  the  case  cited  by 
Gallatin:2 

"A  more  striking  instance  of  the  sudden  alterations  in 
value  to  which  notes  not  convertible  into  specie  are  liable 
is  to  be  found  in  that  which  took  place  in  England,  in  the 

1  Mitchell,  p.  189.  'Writings,  III.,  p.  263. 

425 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

spring  of  1815,  on  the  landing  of  Bonaparte  from  the  isl- 
and of  Elba.  The  bank-notes  had  gradually  risen  in  value 
since  the  peace,  and  were  not  depreciated  more  than  12$ 
per  cent,  in  the  beginning  of  March.  Towards  the  end  of 
that  month,  and  within  less  than  a  fortnight,  the  deprecia- 
tion was  25  per  cent.,  although  there  had  been,  during  that 
time,  neither  additional  issues  of  paper  nor  exportation  of 
the  precious  metals." 

Equally  remarkable  were  the  fluctuations  in  the  value 
of  the  "greenbacks"  from  similar  causes.  The  first  re- 
ports from  Chancellorsville  (May  3,  1863),  indicating  a 
Union  victory,  carried  the  gold  value  of  $100  in  green- 
backs to  $67.45.  Three  days  later,  when  all  doubt  of  a 
Union  disaster  was  at  an  end,  the  quotation  had  fallen  to 
$64.62.  When  Gettysburg  was  won,  on  the  other  hand, 
the  quotations  for  currency,  which  had  been  $68.97,  rose 
to  $72.46,  and  the  next  day,  on  news  of  the  capture  of 
Vicksburg,  to  $75.47.'  This  was  a  rise  of  more  than  nine 
per  cent,  and  might  well  have  disconcerted  the  quiet 
tradesman  who  was  accustomed  to  count  upon  a  stable 
value  for  money,  if  domestic  prices  had  followed  the  ups 
and  downs  of  the  gold  premium.  In  the  case  of  exporters 
who  had  sold  their  goods  in  a  gold  market,  while  buying 
raw  materials  and  labor  in  paper,  their  profits  were  sub- 
ject to  the  gold  premium  and  might  be  entirely  wiped  out 
by  too  rapid  a  rise  in  paper  and  a  corresponding  fall  in  the 
amount  of  it  received  for  a  gold  draft. 

Political  events,  foreign  relations,  and  false  news  had 
their  share  also  in  affecting  the  gold  value  of  paper.  The 
assassination  of  Lincoln  carried  down  the  quotation  in  one 
evening  from  $67.97  to  $60.61,  with  a  subsequent  rally  to 
$63.90.  Republican  success  at  the  polls  in  1864,  inter- 
preted as  insuring  the  prolongation  of  the  war  and  the 
indefinite  postponement  of  specie  redemption,  carried 
down  the  quotation  from  $40.65  to  $38. 46.2  Naturally, 

1  Mitchell,  p.  204.  *  Ibid.,  p.  206. 

426 


THE  VALUE  OF  GOVERNMENT  PAPER 

such  an  event  as  the  success  of  Jay  Cooke's  project  for 
obtaining  subscriptions  for  five-twenty  bonds  at  the  rate 
of  $2,000,000  per  day  caused  the  currency  to  rise  from  a 
level  of  about  $65.00  prior  to  March  23,  1863,  to  $71.68 
on  March  25th.  While  these  changes  were  attributed  by 
many  to  "speculation"  in  gold,  the  fact  was  indisputable 
that  the  paper  currency,  being  separated  from  gold  by  its 
inconvertibility,  had  become  in  its  daily  fluctuations  the 
plaything  of  every  breath  of  rumor  and  in  its  permanent 
downward  tendency,  until  the  tide  of  battle  turned,  a 
mirror  of  declining  faith  in  its  ultimate  redemption.  In 
vain  Secretary  Chase,  in  1864,  threw  the  government  stock 
of  gold  upon  the  market.  He  was  obliged  himself  to  con- 
fess in  regard  to  the  gold  premium,  that  "military  success 
is  indispensable  to  its  permanent  decline,  or,  in  the  ab- 
sence of  military  success,  taxation  sufficient  ...  to  reduce 
the  necessity  for  borrowing  to  the  minimum."  * 

Conditions  in  the  South  were  worse  than  in  the  North. 
There  by  the  fall  of  1863  at  least  $700,000,000  in  treasury 
notes  must  have  been  in  circulation,  which  was  increased 
by  several  hundred  millions  during  the  next  two  years.2 
The  value  of  gold  was  expressed  in  multiples  of  paper,  so 
that  by  December,  1863,  $20  in  paper  was  required  to 
purchase  $i  in  gold.  In  the  South  as  in  the  North,  fluc- 
tuations followed  the  news  from  the  battle-field,  and  as 
the  fortunes  of  the  South  declined  the  paper  value  of  gold 
rose  in  March,  1865,  to  $61,  and  the  paper  soon  after  be- 
came practically  worthless.  There  also  the  laborer  suf- 
fered by  the  fall  in  the  purchasing  power  of  his  wages, 
trade  in  many  sections  was  reduced  to  barter,3  and 
speculation  ran  riot  in  both  paper  and  commodities.  The 

1  Mitchell,  p.  227.  *  Schwab,  p.  165. 

'Among  other  instances,  "in  the  fall  of  1862  already  we  find 
an  iron-manufacturing  concern  in  South  Carolina  announcing  that 
it  will  barter  given  quantities  of  nails  and  iron  for  given  quantities 
of  bacon,  leather,  flour,  corn,  and  other  products." — Schwab,  p. 
163. 

427 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

effect  upon  legitimate  business  is  thus  set  forth  by 
Schwab:1 

"With  the  value  of  the  currency  constantly  falling,  and 
the  price  of  commodities  rising,  the  holder  of  notes  felt 
the  strongest  incentive  to  turn  them  into  commodities. 
The  longer  he  held  the  notes,  the  less  they  would  buy. 
The  rising  market  invariably  led  to  the  wildest  specula- 
tion, into  which  everyone  was  necessarily  and  unconscious- 
ly drawn.  .  .  .  With  prices  constantly  rising,  it  seemed  im- 
possible to  lose  by  any  venture,  and  all  seemed  to  grow 
rich  by  investing  their  notes  in  commodities,  and  selling 
these  at  an  advance.  The  mania  affected  young  and  old 
alike,  and  extended  to  every  kind  of  commodity.  As  one 
observer  put  it,  '  Every  man  in  the  community  is  swin- 
dling everybody  else.' " 

Where  direct  redemption  of  government  paper  at  par 
on  demand  is  impracticable,  a  means  of  determining  its 
value  with  a  certain  degree  of  effectiveness  has  been  found 
in  the  state  of  the  foreign  exchanges.  The  manner  in 
which  the  value  of  such  paper  in  specie  has  moved  up  or 
down  in  response  to  special  demands  or  to  alterations  in 
supply  has  gone  far  to  demonstrate  the  theory  that  money 
is  a  commodity  having  a  special  use  as  a  medium  of  ex- 
change and  that  a  limited  quantity  of  paper  can  be  main- 
tained in  circulation  for  fulfilling  this  use  without  deprecia- 
tion. The  difficulty  of  applying  this  theory  in  practice  has 
been  that  of  restraining  the  primary  issues  within  tem- 
perate limits  and  afterwards  finding  an  efficient  means  of 
expanding  or  contracting  them  in  conformity  with  the 
movement  of  foreign  exchanges. 

The  principle  that  the  foreign  exchanges  are  the  best 
practical  test  of  the  value  of  a  paper  currency  was  set 
forth  in  the  Bullion  Report  made  to  the  British  Parlia- 
ment by  Sir  Richard  Homer  in  1811.  The  cost  of  an 
ounce  of  gold  in  English  bank-notes  had  then  risen  to  £5 

1  The  Confederate  States  of  America,  p.  229. 
428 


THE  VALUE  OF  GOVERNMENT  PAPER 

when  its  gold  value  was  £3  1 75. 6d .  Notwithstanding  this 
patent  fact,  it  was  contended  by  the  advocates  of  con- 
tinued issues  of  notes  that  it  was  gold  which  had  risen  in 
value  and  not  notes  which  had  fallen.  It  was  sought  to 
set  up  the  remarkable  theory  that  the  pound  sterling  was 
an  intangible  measure  of  value  and  was  not  a  definite 
weight  of  metal.  Even  the  directors  of  the  Bank  of 
England  adopted  the  extraordinary  view  that  so  long  as 
they  discounted  good  domestic  bills  of  exchange,  there 
could  not  be  over-issues  of  bank-notes,  whatever  might 
be  rates  of  foreign  exchange.  The  Bullion  Report  de- 
molished these  theories  and  held  to  the  true  principle,  that 
currencies  which  depart  from  a  fixed  value  in  gold  have 
ceased  to  have  any  value  except  that  determined  by  their 
relations  to  gold. 

One  of  the  most  interesting  illustrations  of  the  influence 
of  the  foreign  exchanges  upon  an  irredeemable  paper  cur- 
rency is  afforded  by  the  history  of  Brazil.  As  a  large  part 
of  the  produce  of  the  country  is  exported,  the  foreign  ex- 
changes play  an  important  part  in  determining  the  move- 
ments of  money.  Issues  of  government  paper  took 
place  before  1860,  but  it  was  about  that  time  that  metallic 
money  disappeared  from  circulation  and  the  paper  cur- 
rency became  inconvertible.  Par  of  exchange  was  2jd. 
in  British  gold,  and  the  fact  that  exchange  did  not  fall 
below  par  on  the  issue  of  40,000,000  milreis  in  paper  has 
been  cited  as  evidence  that  "the  quantity  of  paper  money 
in  circulation  exercises  no  influence  on  the  rate  of  ex- 
change." What  then  occurred,  however,  was  the  sub- 
stitution of  paper  for  gold,  leaving  the  quantity  of  the 
circulation  substantially  unaltered.  As  the  situation  is 
explained  by  Wileman : l 

"When  gold  had  emigrated  to  the  value  of  the  in- 
creased emission  prices  returned  again  to  their  normal 
level,  and  exchange  to  par,  international  exchange  having 

1  Brazilian  Exchange,  p.  164. 
429 


THE    PRINCIPLES    OP    MONEY    AND    BANKING 

been  meanwhile  uniformly  favorable,  whilst  the  foreign 
loans  of  1858,  1859,  and  1860,  undoubtedly  powerfully  in- 
fluenced the  final  result.  It  was,  therefore,  perfectly 
practicable  in  1860  to  increase  the  amount  of  paper  money 
in  circulation  without  any  apparent  depreciation." 

From  1860  to  the  fall  of  the  empire  in  1889  there  were 
occasional  excessive  issues  of  paper,  but  also  several  rallies 
in  the  rate  of  exchange,  which  left  the  country  upon  a 
comparatively  sound  basis,  with  exchange  at  par.  The 
disorders  attending  the  change  of  government,  however, 
resulted  in  the  increase  of  the  circulation  (including  irre- 
deemable bank-notes)  from  198,815,562  milreis  in  1889  to 
703,825,960  milreis  in  1894.  Inevitably,  under  such  a  del- 
uge of  paper  exchange  fell — from  an  average  of  27 '\d.  in 
1889  to  lofad.  in  1894.  The  fact  that  exchange  was 
several  times  at  par,  however — in  1875  as  well  as  in  1889 — 
besides  having  remained  comparatively  steady  above  25^. 
from  1860  to  1864,  afforded  an  illustration  of  what  can  be 
accomplished  in  the  regulation  of  an  inconvertible  cur- 
rency where  the  quantity  is  not  excessively  increased. 
Even  the  fall  of  exchange  from  1875  to  1885 — from  zT\d. 
to  iS^d. — although  amounting  to  about  thirty  -  three 
per  cent.  — was  equivalent  to  only  3.3  per  cent,  per  year 
and  was  only  gradually  felt  in  wages  and  prices. 

Reduction  of  the  volume  of  out-standing  paper  was 
one  of  the  essential  provisions  of  the  funding  contract 
with  the  Rothschilds  signed  at  London  in  May,  1898. 
Exchange  then  oscillated  between  6f$<f.  and  7fd.  Be- 
tween that  date  and  June,  1901,  there  was  a  reduction  in 
outstanding  paper  of  94,738,000  milreis  and  exchange 
moved  up  to  i2d.  —  a  rise  of  sixty  per  cent.1  Almost 
equally  rapid  was  the  improvement  in  the  next  few  years, 
which  carried  exchange  rates  as  high  as  i  *}d.  in  the  spring 
of  1905.  The  question  was  already  being  seriously  de- 

1  Economiste  Ruropicn  (March  24,  1905),  XXVII.,  p.  361. 
Closely  related  to  the  improvement  in  financial  conditions  was  the 
termination  of  deficits  in  the  budgets. 

430 


THE  VALUE  OF  GOVERNMENT  PAPER 

bated  in  Brazil  upon  what  basis  specie  payments  should 
be  resumed — whether  at  i2d.,  which  would  legalize  the 
average  of  many  months  up  to  1905,  or  at  a  slightly  higher 
rate. 

This  question  of  the  rate  at  which  gold  payments  should 
be  resumed  is  always  an  important  one  in  countries  seek- 
ing to  abandon  the  system  of  inconvertible  paper.  In  the 
United  States  in  1875  the  decision  was  for  a  return  to  a 
gold  dollar  of  the  same  weight  and  fineness  as  that  in  use 
before  the  Civil  War.  Specific  performance  of  the  con- 
tract to  pay  such  a  dollar,  upon  the  ground  of  common 
honesty,  was  the  argument  chiefly  employed  and  the  one 
which  prevailed.  There  is  much  to  be  said,  however,  in 
favor  of  recognizing  actual  conditions  by  adapting  the 
unit  to  its  gold  value  at  about  the  time  of  resumption. 
This  was  the  policy  adopted  in  Austria-Hungary  in  1892 
and  in  Russia  in  stabilizing  the  paper  ruble  in  1894.  Such 
a  method  avoids  the  disturbance  of  wages  and  prices  which 
occurs  when  the  value  of  the  monetary  unit  is  suddenly  or 
progressively  enhanced.  In  the  case  of  paper  money, 
moreover,  it  is  much  more  justifiable  than  in  the  case  of 
bonds,  because  the  losses  which  have  occurred  by  the  de- 
preciation of  the  paper  have  been  diffused  among  many 
persons  and  over  a  long  period  of  time.  The  holders  of  such 
paper  receive  it  at  substantially  its  current  value  and  not 
at  the  value  of  the  gold  unit  in  which  it  is  expressed.  For 
in  most  cases  it  was  not  even  issued  at  the  value  of  the 
unit.1 

More  important  than  the  interest  of  the  individual  note- 
holder in  such  cases  is  the  interest  of  the  producer  for  ex- 
port. An  appreciating  unit  means  for  him  an  increased 

1  Thus,  in  the  case  of  the  Brazilian  paper  money,  the  sum  of 
595,465,000  milreis  issued  from  January  i,  1890,  to  December  31, 
1898,  at  times  when  gold  exchange  varied  all  the  way  from  26. 25^. 
down  to  5.62<f.,  represented  a  gold  value  of  327,241,000  milreis  of 
the  old  standard. — Economist*  Europcen  (April  7,  1905),  XXVII., 
p.  424- 

431 


THE    PRINCIPLES    OF    MONEY    AND    BANKING 

cost  of  production  (because  of  his  inability  to  at  once  re- 
duce wages  and  the  cost  of  raw  materials)  without  any 
compensating  increase  in  gold  price  in  foreign  markets. 
Having  profited  by  a  depreciating  currency  at  the  ex- 
pense of  his  laborers,  he  finds  that  the  profits  which  he  has 
derived  from  such  conditions  are  reversed  by  an  appre- 
ciating unit.  He  is  in  a  position  to  understand  the  fact 
brought  out  in  regard  to  the  dislocation  of  the  exchanges 
between  gold  and  silver  countries,  that  the  apparent  profit 
of  the  exporter  is  obtained  by  surrendering  a  constantly 
increasing  quantity  of  national  products  for  foreign  prod- 
ucts and  at  the  expense  of  the  economic  impoverish- 
ment of  the  country.1  Such  a  feverish  stimulus  to  special 
industries  works  harm  in  another  way.  It  causes  neglect 
of  the  culture  of  necessary  food  products,  like  rice,  and 
the  importation  of  foreign  stocks,  which  have  to  be  paid 
for  on  the  basis  of  the  high  gold  values  of  the  countries 
where  they  are  produced.2  To  guard  against  such  evils  in 
future,  consecration  by  law  of  the  status  quo,  or  approxi- 
mately that,  has  been  preferred  in  recent  currency  re- 
organizations. 

An  imperfect  method  of  maintaining  the  value  of 
government  paper  at  parity  with  foreign  exchange  is 
afforded  by  the  issue  of  notes  at  a  fixed  rate  for  gold. 

1  When  exchange  in  Brazil  rose  to  ijd.,  in  the  spring  of  1905,  it 
was  reported  by  the  United  States  consul  at  Para,  that  in  the  case 
of  cacao,  "the  price  offered  to  the  producer  is  actually  less  than  it 
costs  him  to  gather  and  prepare  his  crop,  not  including  its  bringing 
to  this  market,  and,  consequently,  orders  have  been  sent  up  the 
river  not  to  gather  the  cacao,  but  to  let  it  rot  on  the  trees." — 
U. S.  Consular  Reports  Qune,  1905),  LXXVIII.,  p.  243. 

2  Carvalho,  p.  14.     The  rise  of  Brazilian  exchange  reacted  on 
gold  exchange  in  Portugal  in  the  spring  of  1905,  by  reason  of  the 
disposition  of  Brazilian  importers  to  seize  the  occasion  of  favor- 
able rates  to  settle  old  debts  in  Portugal. — Economiste  Europten 
(February  24,  1905),  XXVII.,  p.  228.     This  would  not  have  hap- 
pened to  the  same  extent  if  the  rise  had  not  been  considered  as 
transitory. 

432 


THE  VALUE  OF  GOVERNMENT  PAPER 

This  is  the  method  which  has  recently  been  adopted  by 
the  Argentine  Republic  in  the  effort  to  steady  its  currency 
system,  long  deranged  by  issues  of  paper  which  the 
government  was  not  strong  enough  to  redeem.  Large 
crops  sold  abroad  did  not  create  at  once  a  corresponding 
demand  for  foreign  commodities  and  were,  therefore,  paid 
for  in  English  gold.  This  gold  was  not  a  customary  and 
convenient  method  of  circulation  in  the  Argentine  Re- 
public, because  no  provision  had  been  made  for  its  con- 
version into  Argentine  coin.  The  government,  however, 
agreed  to  receive  it  at  the  Casa  de  Conversion  at  a  fixed 
rate  for  its  own  notes,  issuing  a  paper  peso  for  each  forty- 
four  centavos  which  were  deposited  in  gold.  The  offer  to 
make  this  exchange  would  not  have  inspired  confidence 
except  for  the  fact  that  the  government  had  ceased  the 
issue  of  notes  except  for  gold.  Practically,  therefore, 
under  this  systemthe  excess  of  the  Argentine  currency 
above  a  certain  limit  consists  of  gold  or  its  paper  repre- 
sentatives. This  system  can  be  regarded  as  only  a  step 
towards  ultimate  redemption  of  the  paper  on  demand  in 
gold,  but  contributed  greatly  to  improve  the  condition 
of  the  Argentine  currency.1 

The  essential  difficulty,  however,  in  all  government 
measures  for  regulating  the  value  of  government  paper 
issues  is  the  absence  of  power  and  flexibility  in  govern- 
ment machinery.  It  is  a  misconception  which  is  widely 
prevalent  that  the  financial  power  of  the  government  is 
greater  than  that  of  the  mercantile  community.  Thus 
it  was  said  by  Spaulding,  in  urging  the  legal-tender  law 
of  1862  upon  Congress:2 

1  At  the  close  of  1904  the  stock  of  out -standing  paper  was 
410,000,000  pesos,  which  at  the  rate  of  forty-four  centavos  was 
equal  to  about  $180,000,000  United  States  currency  and  was 
covered  by  gold  to  the  proportion  of  about  thirty-five  per  cent. 
Vide  Economiste  Europien  (March  24,1905),  XXVII.,  p.  357. 

1  History  of  the  Legal  -  Tender  Paper  Money  Issued  during  the 
Great  Rebellion,  p.  37. 

'-*8  433 


"I  am  unwilling  that  this  government,  with  all  its  im- 
mense power  and  resources,  should  be  left  in  the  hands 
of  any  class  of  men,  bankers  or  money-lenders,  however 
respectable  and  patriotic  they  may  be.  The  government 
is  much  stronger  than  any  of  them.  Its  capital  is  much 
greater.  It  has  control  of  all  the  bankers'  money,  and 
all  the  brokers'  money,  and  all  the  property  of  the  thirty 
millions  of  people  under  its  jurisdiction.  Why,  then, 
should  it  go  into  Wall  Street,  State  Street,  Chestnut 
Street,  or  any  other  street,  begging  for  money?  Their 
money  is  not  as  secure  as  government  money.  All  the 
gold  they  possess  would  not  carry  on  the  government 
for  ninety  days.  They  issue  only  promises  to  pay,  which, 
if  Congress  does  its  duty,  are  not  half  as  secure  as  United 
States  Treasury  notes  based  upon  adequate  taxation 
upon  all  the  property  of  the  country." 

It  is  in  the  concluding  phrase  of  this  paragraph  that  one 
of  its  sophistries  is  hidden.  It  was  precisely  because 
Congress  did  not  levy  "adequate  taxation  upon  all  the 
property  of  the  country"  that  the  issue  of  irredeemable 
paper  was  thought  to  be  necessary.  Had  such  taxation 
been  levied,  the  credit  of  the  government  would  have 
been  so  high  that  Wall  Street  and  other  money-centres 
would  have  competed  for  possession  of  its  interest- 
bearing  obligations  with  the  same  eagerness  as  for  the 
obligations  of  other  solvent  borrowers  and  the  issue  of  a 
forced  loan  in  irredeemable  paper  would  not  have  been 
required.  It  is  as  idle  to  talk  of  the  resources  of  the  na- 
tion supporting  paper  money  when  redemption  from 
those  resources  is  refused  as  to  talk  of  the  resources  of  the 
owner  of  an  entailed  estate  when  he  refuses  to  pay  his 
bills.  It  is  not  because  bankers  have  gold  that  they  have 
credit ;  it  is  because  they  have  resources  for  commanding 
gold  and  stand  ready  to  fulfil  their  promises  to  pay  gold. 
When  a  government  is  in  a  like  position — commanding 
quick  assets  and  ready  to  employ  them  to  fulfil  its  prom- 
ises— its  credit  likewise  is  good. 

434 


THE  VALUE  OF  GOVERNMENT  PAPER 

But  a  government  is  not  ordinarily  in  a  good  position  to 
regulate  the  movements  and  supply  of  the  currency,  even 
when  it  has  good  credit,  intelligence,  and  right  purposes. 
A  government  ordinarily  has  no  quick  assets  in  reserve, 
like  those  of  a  bank.  It  receives  considerable  sums  from 
the  public  in  taxes,  but  is  compelled  to  pay  them  out 
again  for  the  usual  expenses  of  the  public  service.  Un- 
der a  normal  treasury  system  public  expenditures  are 
nearly  equal  to  receipts  and  the  amount  collected  in 
taxation  is  not  in  excess  of  the  amount  disbursed.1  Where 
a  surplus  of  receipts  accumulates  the  government  acquires 
a  certain  degree  of  banking  power,  but  experience  has 
shown  that  this  power  is  clumsily  exercised.  This  must 
be  the  case  even  under  the  most  competent  officials,  be- 
cause government  operations  are  not  based  upon  business 
transactions.  A  banker,  whether  he  possesses  unusual 
financial  foresight  or  not,  governs  the  volume  of  his  loans 
and  his  rates  of  discount  by  the  demands  made  upon  him 
by  the  business  community.  A  government  encounters 
no  such  demands  in  concrete  form,  and  can  only  act 
blindly  and  arbitrarily  by  transferring  sums  from  its  own 
funds  to  those  of  the  banks  and  back  again,  or  by  chang- 
ing the  time  or  manner  of  its  disbursements.  These  dis- 
bursements are  for  public  purposes  and  are  not  com- 
mercial. They  often  run  counter  to  the  commercial 
movement. 

Hence  any  move  made  by  a  public  official  to  control 
the  volume  of  money,  however  well-intended  and  well- 
directed  it  may  be,  cannot  in  the  nature  of  the  case  be  the 
result  of  normal  business  causes,  acting  automatically, 

1  The  average  receipts  of  the  United  States  Treasury  are  below 
$2,000,000  per  day.  Bank  clearings  in  the  United  States  for  the 
year  ending  September  30,  1904,  were  $102,150,313,982,  or  at  the 
rate  of  more  than  $300,000,000  per  day.  The  banks,  therefore, 
may  be  said  to  be  one  hundred  and  fifty  times  stronger  than  the 
Treasury  in  quick  assets,  in  spite  of  the  reserve  powers  of  the 
government. 

435 


THE    PRINCIPLES    OF    MONEY   AND    BANKING 

to  the  same  extent  as  the  measures  of  a  banker.  In  con- 
sequence of  these  conditions,  even  those  governments 
which  have  sought  to  regulate  the  monetary  system 
through  their  own  agencies  have  chosen  to  create  na- 
tional banks  rather  than  to  act  directly  through  the  pub- 
lic Treasury.  In  Germany  the  Imperial  Bank  receives  its 
governor  and  deputy  governor  from  the  government,  but 
it  is  owned  largely  by  private  shareholders  and  in  its  daily 
operations  comes  in  constant  contact  with  the  market. 
In  France  also  the  governor  and  deputy  governors  of  the 
bank  are  appointed  by  the  government,  but  this  has  rarely 
interfered  with  their  independent  action  as  bankers.1  In 
Russia,  although  the  entire  capital  of  the  bank  is  owned 
by  the  state,  the  regulation  of  the  money  market  is  better 
attained  through  a  banking  institution  than  by  arbitrary 
interference.  In  all  these  countries,  as  we  shall  see  here- 
after, experience  has  demonstrated  that  the  determina- 
tion of  the  quantity  of  money  is  best  left  to  the  business 
community  and  that  the  issue  of  instruments  of  paper 
credit  is  best  regulated  by  the  demands  of  the  business 
community  upon  the  banks,  subject  only  to  such  regula- 
tions as  will  promote  the  convenience  and  secure  the  safety 
of  those  who  use  these  instruments. 

In  restoring  stability  to  a  paper  currency,  the  co-opera- 
tion of  the  banks  is  of  primary  importance.  When  specie 
payments  were  resumed  in  the  United  States  in  1879,  the 
banks  of  New  York  and  Boston  agreed  to  abolish  gold 
deposits  and  to  accept  government  notes  freely  in  dis- 
charge of  balances  against  one  another.2  In  Austria- 
Hungary  and  in  Russia  arrangements  were  made  with  the 
national  bank  of  issue  to  accumulate  gold,  to  issue  its  own 
notes  to  replace  the  paper  promises  of  the  government, 
and  to  lend  its  aid  in  giving  steadiness  to  exchange.  In 
Brazil  also  the  intervention  of  the  Bank  of  the  Republic 
in  the  exchange  market,  by  buying  and  selling  in  less  than 

1  Vide  A  History  of  Modern  Banks  of  Issue,  p.  75,  and  this  work, 
bk.  v.,  chap.  vi.  2  Noyes,  p.  46. 

436 


THE  VALUE  OF  GOVERNMENT  PAPER 

four  years  £30,676,000  in  bills,  contributed  to  fix  the  ex- 
change rate  near  i  zd.  and  to  prepare  the  country  for  this 
rate  as  the  permanent  basis  of  the  restored  monetary 
system.1 

1  Economiste  Europten  (April  28, 1905),  XXVII.,  p.  520. 


END    OF    VOL.    I. 


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